The doji candlestick pattern can be an ominous signal in markets, forewarning a temporary pause in price action before the next big move. As a result, the candlestick can often mean there is significant indecision, and commonly takes place at the top or bottom of a trend.
Because its appearance means a potential change in market momentum, it is one of the most important Japanese candlestick patterns for a technical analyst to pay attention to.
In this in-depth guide on trading doji, we’ll explain the various doji candlestick types, how to identify them, and what doji patterns are telling the market.
What Does A Doji Candle Mean? Doji Meaning And Definition
A doji is a commonly found pattern in a Japanese candlestick price chart in various markets, including crypto, stocks, forex currencies, commodity futures, and more. It is an important signal in technical analysis that commonly appears at the top or the bottom of a large price move.
The doji candle pattern is characterized by having a small real body where the opening price and closing price of the candle are roughly the same and nearly equal.
What Does A Doji Tell Us? Candlestick Doji Patterns Explained
The appearance of a doji represents indecision in the market. When doji appear as a cluster, the indecision is even more significant. Because doji candles represent indecision in general, they are more noteworthy when they appear during a strong trend. A lack of trend signifies extended periods of indecision and a sideways market, so doji during these phases are less effective to trade.
If a doji appears during a strong trend, it typically means one of two things: a momentary pause in price action before powerful continuation, or a brief stall before a full price reversal. Both instances are a sign of indecision.
When a doji appears during an uptrend, it is potentially bearish and suggests that buyers are weakening in strength. If the doji appears during a downtrend, it is bullish and could mean that sellers are starting to run out of steam.
How To Read Doji Candlesticks: Doji Candlestick Chart Pattern Trading Tips
A doji is typically viewed as a neutral pattern. Because the doji is a neutral pattern by itself, it is imperative to take note of the direction and strength of a trend. If a doji appears after a strong move, there is a possibility of a reversal in the opposite direction. Doji by themselves do not provide a reliable trading signal and can appear in clusters.
Doji also appear as part of other candlestick patterns such as the morning star, evening star, and many others. This is due to the high probability of reversal coming from the forming indecision in the market.
Doji Example: Trading The Doji Pattern In Crypto
The below example is a doji pattern appearing on monthly timeframes on BTCUSD price charts. The doji was formed at the high in November 2021 at $68,000 and is the current Bitcoin all-time high. The doji signaled to the market there was indecision at an important resistance level, and a powerful reversal followed. Traders would want to place a stop loss above the doji candle upper shadow.
Common Types Of Doji Candle Patterns
Reading doji candlestick patterns requires the technical analyst or trader to know the various types of doji. A bullish trader and a bearish trader will want to react differently to their signals.
Here at the many types of doji candlestick patterns and how to identify them:
A neutral doji form when the open and close prices are roughly the same or equal. A doji can form as a red doji candle or a green doji candle. By themselves, a common doji doesn't tell an analyst much unless they appear after a powerful move on high volume. Their appearance is more significant at support or resistance in trending markets.
A long-legged doji forms, much like the common doji, with an open price and close price roughly the same or equal. The primary difference is that there is an extremely long upper shadow and lower shadow, suggesting that the indecision is even more prominent in the market during the trading session.
A gravestone doji is a bearish reversal signal with a small candle body with a tight open and close, then a long upper shadow. The appearance of a gravestone doji typically suggests that a trend is near a major turning point and could lead to a strong pullback.
A dragonfly doji is a bullish doji candlestick reversal pattern with a small candle body featuring nearly the same open and closing price. A dragonfly doji appears when a major bullish trend reversal is coming. The long lower shadow shows that bulls were able to successfully defend a strong move by bears.
Star doji form as part of a larger, three-candle reversal pattern. In a morning star pattern, the South doji star forms at the valley of a large move down and is followed by a large reversal candle in the opposite direction. In an evening star pattern, the North doji star forms at the peak of a large move up and is followed by a large reversal in the opposite direction.
There are also several other types of doji-like candlestick patterns that don’t qualify as doji, but can often be confused as such. These patterns include the hammer, or hanging man patterns and form with more rarity.
Doji Vs Spinning Top: What Is The Difference?
The spinning top is yet another doji-like pattern that signals indecision in the market. The primary difference between a spinning top and a doji is the length of the upper and lower shadows, also called wicks.
Both candles will have a small real body candle, where the open and close of the candlestick doji were roughly the same. In a spinning top, the wicks would be longer. This is still confusing, as is roughly the same as a long-legged doji. However, long-legged doji more typically signal continuation whereas a spinning top or bottom signals a possible reversal setup.
The Advantages Of Doji Candlestick Patterns
The main advantage of doji candlestick patterns comes from the fact that they show periods of indecision in the market. This allows traders to take positions accordingly and reap the potential reward in profits if the trade goes as expected.
Doji candlesticks also work well in conjunction with other technical indicators, such as when a doji forms at the upper or lower boundary on the Bollinger Bands (example below). Using the popular technical indicator, the doji acts as a confirmation candle and creates a higher probability of a trend reversal.
The Disadvantages Of Doji Candlestick Patterns
The disadvantages of doji candlesticks come from the fact that they are neutral patterns at their core. This leads traders to take a position expecting a possible reversal, only for the doji to instead represent indecision before continuation.
A trader can place a stop-loss above or below the doji to protect against large drawdowns or prevent losses if the market moves in the opposite direction than what was expected.
Trading Doji Candlesticks: How To Trade The Doji Candlestick Pattern on Margex
Step 1 - Open up the price chart of the crypto asset of choice and scan for doji candlesticks.
Step 2 - Create a buy or sell order depending on the direction the reversal is expected to take. In the ETHUSD example below, a sell order would be placed once a reversal was validated by the following red confirmation candle.
Step 3 - Place a stop loss order above the doji candlestick pattern to prevent any large losses associated with the market moving against your position.
Step 4 - Consider taking profit at one of several predetermined price targets. Traders should prepare a more conservative and a more aggressive price target and monitor the position and market from there.
Because there are many different types of doji out there, along with spinning tops and other similar Japanese candlestick patterns, many questions often remain. We’ve designed this FAQ to address the most commonly asked questions about doji candlesticks.
What is a reversal doji candlestick pattern?
A doji candlestick is often a sign of indecision in the market, making it a possible reversal or continuation signal. It is necessary for a trader or analyst to consider what else is going on around the doji and where during a trend it has appeared. The doji candlestick meaning a possible reversal allows a trader to take a position accordingly.
Is a doji candle bearish?
A bearish trader would only benefit from the appearance of a doji if it formed after a strong uptrend. The doji would signal possible indecision in the market and weakness in buyers that could lead to a reversal to the downside.
Is a doji pattern bullish?
A bullish trader would only benefit from the appearance of a doji if it formed after a strong downtrend. The doji would signal possible indecision in the market and weakness in sellers that could lead to a reversal to the upside.
What happens after a doji candle?
Typically, one of two things happen after a doji candle: a reversal of the trend in the opposite direction, or the continuation of the trend in the same direction. Occasionally, doji can appear in clusters which indicate even more indecision and a sideways market.
How do you read a doji?
Reading a doji involves finding a candlestick with a small real body with an opening and closing price that is virtually the same. A doji will also have a small upper and lower shadow, or else it is a spinning top or a long-legged doji. Long-legged doji appear ahead of continuation while a spinning top or bottom is followed by a reversal.
What does three dojis in a row mean?
Three dojis in a row represents a tri-star doji and powerful indecision taking over the market. A tri-star pattern near support or resistance increases the probability of a strong reversal.
What is doji breakout?
Doji breakout is a trading strategy that is a low risk, high reward trading setup. The doji candle low and high represent a trading range on lower timeframes. A close outside of the range confirms a breakout and tells a trader to take an entry. The trader would then want to place a stop loss order above the other side of the doji range to protect against any potential losses associated with the market moving against the position.
Why is a doji important in markets?
A doji is important in markets because they signal indecision and a possible trend change when combined with other patterns and other technical indicators.