Popularly known as the ‘Doji candle’, the Doji candlestick chart pattern is one of the most unique formations in the world of trading. The Doji candlestick pattern can lead to high profits in trading. The versatility of this candlestick pattern is appreciated by all types of traders for different time frames.

 

What is the Doji candlestick chart pattern?

In Japanese, “Doji” means blunder or mistake, referring to the rarity of having the open and close price be exactly the same. The Doji candlestick chart pattern is a formation that occurs when a market’s open price and close price are almost exactly the same. Doji candlesticks look like a cross, inverted cross, or plus sign. There are different variations of the pattern, namely the Doji star, long-legged Doji, dragonfly Doji, Gravestone Doji, and the 4 price Doji.

The vertical line of the Doji pattern is called the wick, while the horizontal line is the body. The wick can vary in length, as the top represents the highest price, and the bottom represents the low. The body represents the difference between the opening and closing price. This element can vary in height, but not in width.

 

How is a Doji candlestick formed?

A Doji candlestick is formed when the market opens and bullish traders push prices up while bearish traders reject the higher price and push it back down. It could also be that bearish traders try to push prices as low as possible, and bulls fight back and get the price back up. In other words, the market has explored upward and downward options but then ‘rests’ without committing to either direction.

The upward and downward movements that happen between open and close form the wick. The body is formed when the price closes at more or less the same level as it opened.

 

What does a Doji tell traders?

A Doji is created when the open and close for a stock are virtually the same. Doji tends to look like a cross or plus sign and have small or nonexistent bodies. From an auction theory perspective, Doji represents indecision on the side of both buyers and sellers. Everyone is equally matched, so the price goes nowhere; buyers and sellers are in a standoff.

Some analysts interpret this as a sign of reversal. However, it may also be a time when buyers or sellers are gaining momentum for a continuation trend. Doji is commonly seen in periods of consolidation and can help analysts identify potential price breakouts.

What Is the Difference Between a Doji and a Spinning Top?

Spinning tops are quite similar to Doji, but their bodies are larger, where the open and close are relatively close. A candle’s real body can generally represent up to 5% of the size of the entire candle’s range in order to be classified as a Doji. Any more than that, it becomes a spinning top.

A spinning top also signals weakness in the current trend, but not necessarily a reversal. If either a Doji or spinning top is spotted, look to other indicators such as Bollinger Bands to determine the context to decide if they are indicative of trend neutrality or reversal.

Limitations of a Doji

In isolation, a Doji candlestick is a neutral indicator that provides little information. Moreover, a Doji is not a common occurrence; therefore, it is not a reliable tool for spotting things like price reversals. When it does occur, it isn’t always reliable either. There is no assurance the price will continue in the expected direction following the confirmation candle.

Estimating the potential reward of a Doji-informed trade can also be difficult since candlestick patterns don’t typically provide price targets. Other techniques, such as other candlestick patterns, indicators, or strategies are required in order to exit the trade when and if profitable.

 

Key Takeaways:

  • A Doji is a candlestick pattern that looks like a cross as the opening price and the closing prices are equal or almost the same.
  • When looked at in isolation, a Doji indicates that neither the buyers nor sellers are gaining – it’s a sign of indecision.
  • There are different types of Doji candlestick patterns, namely the Common Doji, Gravestone Doji, Dragonfly Doji, and Long-Legged Doji.
  • Before acting on any signals, including the Doji candlestick chart pattern, one should always consider other patterns and indicators.

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