A Doji is a type of Candlestick pattern. It reflects how the price of an asset changed during a particular period.
A Doji Star is characterized by having a small upward and downward shadow.
The horizontal bars of a Candlestick represent the opening and closing prices of any given market instrument. In the case of a Doji the two prices are virtually the same and therefore there is no ‘body’ to the candle. The vertical lines represent the range of price action during the period. The highest point of the upper shadow reflects that period’s trading high and the lowest part of the lower shadow reflects the low of the time period.
Short shadows denote a price action to have been within a small range, longer shadows denote a greater price range.
Meaning and Interpretation
A Doji signifies that a market is not clearly trending. Buying and selling throughout the time period resulted in no material change to price levels. This equilibrium may be a common occurrence in a sideways or quiet market but is seen to be more significant should it occur after a period of market Momentum.
A Doji that comes after a noticeable trend can be seen as a sign that there is soon to be a break to the current trend or even a reversal. Traders that were in the Momentum trade might look to take profits. Some might decide to build a position into the reversal, or at least consider that the market is for now not giving a clear indication of direction.
A Long Legged Doji has upper and lower shadows that demonstrate the price range over the period was relatively large. That can be interpreted as illustrating there is a great amount of indecision in the market. Both bears and bulls have failed to drive the market to close at a price away from the market opening. The length of the shadows is taken to illustrate the extent to which they tried to make that happen.
In this instance the opening and closing price are both at the low of the time period. It’s commonly taken to be a bearish signal.
In this instance the opening and closing price are both at the high of the time period. It’s commonly taken to be a bullish signal.
Dojis are one indicator among many. Basing a trading strategy solely off them is probably best tested in a Demo account. Many other signals, such as traded volumes and the Stochastic Oscillator can be incorporated into your decision making process.
It’s also important to consider what time frame you are analyzing. A Doji that forms over the period of one week is the result of a greater amount of market activity than one formed over a 10 minute period. The former Doji is therefore held to be an indication of widespread market uncertainty.
The market data and diagnostic tools offered by Broker Platforms are a great free resource. Even if you don’t go on to develop a trading strategy that is based on Dojis it is important to understand that what they reflect happened over a particular period and what they are telling you about the markets.