A Doji — or more accurately, "Doji "—is a name for a session in which the candlestick for security has an open and close that are virtually equal and are often components in patterns. Doji candlesticks look like a cross, inverted cross, or plus sign. Alone, Doji is neutral patterns that are also featured in several important patterns.
A Doji candlestick forms when a security's open and close are virtually equal for the given period and generally signals a reversal pattern for technical analysts. In Japanese, "Doji" means blunder or mistake, referring to the rarity of having the open and close price be exactly the same.
A Doji is a candlestick chart pattern where the price moves higher and/or lower throughout a given period of trading, but the price closes very near to where it opened. A Doji candlestick indicates indecision between buyers and sellers; therefore, a Doji pattern can be seen as a potential signal for a trading opportunity.
Several types of Doji candles can occur on a candlestick chart. Depending on where the Doji occurs, each one provides different information to the trader. A Doji could look like a plus sign, a T, or an upside-down T. In certain contexts, a Doji candlestick could indicate that the price is near a topping or bottoming point. At other times, it means that the price may move sideways. Where the Doji occurs in a trend is key to its interpretation.
What is a Doji in trading?
A Doji tells traders that buyers and sellers were balanced at the end of the day, but this may have big implications. If sellers have been dominating and pushing the price down, a Doji suggests that the buyers held their ground. Dojis may indicate bullish and bearish reversals in an asset’s price.
A candlestick has a thick body marking the opening and closing prices. If the close is above the open, the candle is colored white or green. If the open is below the close, the candle is colored red or black. The tails or thin lines above and below the body of the candle mark the high price and low price recorded during the period of the candle. Each candlestick chart pattern says something about the strength of the buyers and sellers within this timeframe. A long green daily candlestick may indicate that the buyers were strong that day, whereas a long red candle may indicate that sellers were strong.
Candlestick traders use this information to make decisions and devise trading strategies. To find out what each type of Doji means, we can look at where the high and low points are and where that Doji occurs within the trend.
Technical analysis of a Doji candle
Technical analysis is the field of studying chart patterns and price movements to determine where the price of an asset may go next. Technical analysis helps to provide information, which can hopefully then be turned into a profitable trade. Before analyzing Doji candles, traders may ask themselves some questions that relate to the context of the candlestick trade:
- What is occurring on the candlestick chart before the Doji pattern forms?
- Is the price moving higher overall in an uptrend?
- Is the price moving lower within an overall uptrend (known as a pullback)?
- Is the price in a downtrend? Is the price in a pullback within an overall downtrend?
- Is the price moving sideways or in a triangle pattern?
- Is the Doji pattern near support or resistance?
Answering these questions can provide insight into where an instrument’s price may move after a Doji form. Technical analysis can be used when analyzing Doji candlestick patterns to signal potential trading opportunities. Now that we know some technical analysis concepts and questions to keep in mind, we will look at the various Doji chart types and discuss some ideas on how to trade them.