Understanding Doji Candlestick Pattern

Understanding Doji Candlestick Pattern

A lot of reversal patterns are one-sided: if they succeed, then the trend will turn upside down and you’ll be able to make a beneficial investment before it even gets properly valuable. It means that if the candles arrange into a peculiar shape, you’ll be able to make sense of it, given all the requirements are met.

Doji patterns are a bit different. It’s an ‘indecisive pattern’. It can lead both to a full reversal of the trend or to its continuation. It’s a phase where, basically, numerous groups try to fight for control over the trend.

If enough bullish traders push the price up, it will go up. That’s what makes this pattern so exciting – each Doji candlestick is like a small battlefield.

What’s Doji?

The word ‘Doji’ originates from Japanese, where it means “equal thing” and it’s very descriptive of the actual pattern. People don’t often balance out one another’s decisions in trading. Doji happens when the trend enters a stalemate, then a lot of people try to push the price one way, and then another group pushes it back.

There can be many of these swings, and they don’t just happen because people got together and decided to teach the other group a lesson. Sometimes, some company simply decide to sell off its shares, and it moves the price way up, nullifying the intraday trends that developed prior to that.

That results in a peculiar sight. Here’s what it consists of:

  1. A tiny (sometimes almost non-existent) candle body
  2. A long wick on either side
  3. An equally long wick on another side.

What does Doji mean?

Doji pattern can appear both after a lengthy bullish trend and a lengthy bearish trend. The direction of the candlestick itself isn’t really substantial. 

It’s also hard to see it coming – nor do you often need to anticipate it, seeing how Doji itself is a herald of an upcoming trend change. It’s true that you can often try and push the price where you want it by exploiting the moment of indecision, but it’s also a tad risky and doesn’t really have any real profit to it.

Understanding Doji Candlestick Pattern

Here is how intraday trading is going inside a Doji candlestick pattern:

  1. Trading usually starts where it ended the day prior – in the same direction and largely with the same ferocity.
  2. Sometime during the day, the normal trend is overtaken by the traders with the opposite goal (if the trend was bullish, the sellers would arrive, for some reason).
  3. After that, the initial group could try to return the price back to normal, which could result in any number of swings.

Whether this battle is intentional or just a natural occurrence on the market, the price is bound to return to the opening value. If it doesn’t, then it’s not a Doji pattern. The pattern doesn’t have any special powers – it’s the behavior and results of this one candlestick that condition it to become a Doji, not the other way around.

What it means, in the end, is that people tried to wrestle the price one way or another, but in the end, no side won – the price didn’t change at all and the trend stopped in a stalemate.

The peculiar part is that anything can happen after that. It is, after all, an indecision pattern. So, how do you use it?

Using Doji to your advantage

Doji pattern is not completely unpredictable, you know. There are ways to determine where the trend will go afterward. They aren’t completely trustworthy, and it’s actually much better to use them to bail. This works both for bullish and bearish trends:

  1. If prior to Doji, you entered the bullish or bearish trend, Doji will be a crossroads for you. Here, you can make one of two decisions:
  1. You can close your positions (either sell or buy back the shares if you’re shorting) or decrease your stake in them.
  2. You can continue to trust in the trend and ignore Doji. If there are indicators that clearly show that the trend will continue, then it’s only reasonable to do so.

If you aren’t sure, then you can just close part of your positions and see if your conclusions about the trend continuation prove true. It’s a good practice for your trading judgment.

Determining the outcome of Doji

You can also try and estimate whether the trend will continue or not. It’s not completely reliable, so you may want to close some of your positions on the market to minimize the risks.

If you want to be really professional about it, you can look up several exquisite tools and indicators. For down-to-earth trading, however, you’ll need just a few basic instruments plus your brain.

First, you may want to turn up the pivot points. These points tell you where the most likely support/resistance zones would be. These are determined based on the prior historical data. While the security can breach zone points (horizontal lines) closer to the middle, the further they go, the more likely it is that they’ll turn around.

These zones are basically your floor and ceiling. Under normal circumstances, the price wouldn’t go beyond the very top or bottom. It will even try to stay away from them. So, by logic, if a Doji happened close to one of the absolutely support or resistance levels, then it’s likely to turn back after the pattern – it’s simply a natural order of things.

That is, it won’t work if something unexpected inflated or deflated the security value. It only works in a natural environment.

Secondly, you may want to see the intraday charts of the Doji candlestick. The things you’ll need to look at are price extremes & the latest trend direction. It’s also better to keep in mind where the closing price is in relation to the opening value.

If all of them are pointing in the same direction, it’s likely that the starting trend on the next day will copy them. It’s not too reliable, however, and you’ll want to use other facts to back it up.

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Carolyn Huntington is an economist, professional trader, and analyst. She made her first big deal in her student years with a profitable investment in Facebook stock. Now the total experience of her trade is 18 years. Over the years of trading, Carolyn has developed its own strategy that allows even those who have never traded on the stock exchange before to earn money. She also creates market forecasts and advises major shareholders, compiles investment portfolios, and teaches how to work with automated advisors.

telephone: 503-547-5192