Candlestick Cheat Sheet
How to Trade Doji Candlestick Patterns
This article will teach you how to trade the Doji candlestick pattern which is one of the most useful patterns in candlestick chart analysis to predict trend reversals.
Doji Candlestick Pattern
The doji is one of the most popular candlestick patterns, as many traders think that it is one of the best ones to trade. It is a single candlestick pattern that occurs when the stock opens and closes near the opening price, forming a horizontal line. The body of the candle is usually very small and can have long wicks.
Doji Candlestick Analysis
A doji represents equilibrium between supply and demand where neither the bulls nor bears are winning. It signifies indecision and uncertainty in the price action of a stock. Although the lengths of the shadows vary, the longer they are, the more significant the Doji becomes. The Doji is an important alert at both the bottom and top of trends.
After an uptrend or a downtrend, the presence of the Doji candle shows that there is indecision between the bulls and bears. The price opens at a level, the bulls and bears move the price up and down during the day, but closes at the level that it opened. This signals that the trend might have lost its steam.
The Doji candle is usually not a great entry candle for a trade and traders should not make decisions based solely on the doji. This is because the doji can be broken either way by the bulls or bears. Traders should wait for the next candlestick to make an appropriate trade, but it does signal that sentiment may be changing.
After an uptrend, the presence of a doji can be a warning that the trend has peaked or is close to peaking. The opposite is true when a doji that appears at the end of a downtrend. After an uptrend, the Doji signals a reversal without needing confirmation but after a downtrend, the Doji requires a bullish day to confirm.
It is important to pay attention to where the doji occurs. For example, if the stock is in the early stages of an uptrend or downtrend, then it is unlikely that the doji is signaling its peak or its bottom. It could just be a pause in the current trend move.
Making trading decisions based on doji candles is enhanced when there is large volume on the signal day and if it's after a long candle body.
Take a look at EEM's chart below. After a downtrend, there is a doji, signaling that the trend might be ending. As previously discussed, after a downtrend, it is better to wait for a bullish day to confirm the reversal. The price gapped up the next day, leading to an uptrend that lasted for over 4 months. You can use this bullish day as an entry point for this stock. There was also high volume during the appearance of the doji and it was after a long candle body, enhancing the reversal signal.
Types of Doji
Understanding the diffferent types of doji will help you learn how to trade doji candlestick patterns.The Doji has different names depending on the location of the opening/closing price and the lengths of the upper and lower shadows.
A Neutral Doji is a small candlestick pattern where the price opens and closes in the middle of the day's high and low.
The Long Legged Doji (Juji) is similar to a neutral doji, but with long upper and lower shadows. This means that the price moved up and down significantly yet closed at or near the opening price. This reflects great uncertainty and indecision between the bulls and bear.
The Gravestone Doji is when the open and close is at the low of the trading range. The price opens at the low of the day, rallies, and then closes back down to the opening price. It signifies that all victories of the day have been lost by the end of the day, hence the name "Gravestone Doji." At the top of a trend, a Gravestone Doji is a variation of the Shooting Star. At the bottom, it is a variation of the Inverted Hammer.
How do you trade a Gravestone Doji? A Gravestone Doji is a reversal pattern which can be either bullish or bearish depending on the position of the candlestick. If a Gravestone Doji appears after an uptrend, it may signal that the trend may start to reverse to a downtrend. Wait to see if the doji low is broken on the next candlestick. If it does, it gives you a sell signal.
The Doji's Dragonfly is when trading opens at the high of the day, trades lower, and the closes at the open price. A long shadow at the bottom of a trend is very bullish. At the top of a trend, it is a variation of the Hanging Man. At the bottom of a trend, it is a variation of a Hammer.
How do you trade a Doji's Dragonfly? Although a Dragonfly Doji can be either bullish or bearish, the pattern works better for bullish reversals. If a Dragonfly Doji appears after a downtrend, it may signal that the trend may start to reverse to an uptrend. If the doji high is broken on the next candlestick, it gives you a buy signal.
The above chart of MYOK shows a Doji's Dragonfly after a downtrend. It is followed by a bullish candle, giving us a buy signal. The stock reversed and continued to go up for about a month.
Trading doji patterns is one of the most popular swing trading strategies.
To find a list of stocks with a doji pattern, try the doji screener. To learn more about Doji and other candlestick patterns, read Profitable Candlestick Trading and Japanese Candlestick Charting Techniques.
Candlestick Trading Strategies related articles
How to Read a Candlestick Chart
Top 10 Candlestick Patterns
How to Trade Bullish Engulfing Candlestick Pattern
How to Trade the Inverted Hammer Candlestick Pattern
Top Trading Books
Test the Signals