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What is a Doji?


Jane Goodwin
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A Doji is a type of Candlestick pattern. It reflects how the price of an asset changed during a particular period.

Star

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.

Long Legged

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.

Gravestone

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.

Dragonfly

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.

Trading Dojis

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.
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Hi Jane, thanks for the question.

Doji candlestick pattern is a transitional or neutral chart formation since it doesn’t directly signal a continuation nor a reversal of the trend. This is why market analysts first think of “indecision” when they see a doji candle.

Looking at the shape, a doji candle has long wicks with a very small body or no body at all. Doji can take place anywhere on the chart, but its importance grows when it is found on the top or bottom of the chart. 

Ultimately, you can classify a doji as both a reversal and a continuation pattern, depending on the final outcome. But is more likely to end up being the reversal pattern as hesitation is hurting the dominant market side more. as the indecision signals there is no firm outcome of who has control over the price action. 

In addition to a classic or “neutral” doji candle which consists of no body and two wicks of similar length on both sides, there are three types of doji candlesticks: gravestone, long-legged, or dragonfly. 

A gravestone doji candle is a bearish reversal pattern which occurs near the end of an uptrend. The bulls, who were successful in pushing the price action higher, failed to force a close near the candle’s high. As a result, the sellers were able to return the price action lower to have an open, close, and low are all near one another. 

A long-legged doji, or a "rickshaw man", is characterized by long wicks on either side. As a doji candle, it signals indecision among traders, although its occurrence within a series of doji candles suggests that the dominant market side may have lost its momentum and the trend may be in the closing stages.

Finally, a dragonfly doji candlestick formation is the opposite of gravestone doji as the open, high, and close are all located in the upper part of the candle, near the high.  

I hope this answer was helpful.


 

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Hi Jane, thanks for being here.

Doji refers to a session where the security candlestick pattern features an equal opening and closing price. Doji candle can have a shape of a cross, inverted cross or plus sign. If it’s alone, Doji is a neutral candle, but it can also be a part of other important patterns. Doji takes shape when the opening and closing price of a security are virtually equal over a certain time period. In technical analysis, doji usually indicates a reversal pattern. Its name is derived from a Japanese word "doji" which means blunder or mistake, based on the rarity of cases where the open and close price are the same.

While Doji typically indicates indecision among market participants, it can also signify a slowing momentum of the current trend.

The pattern is often not very useful to investors as it can worry them. For instance, if the market is currently in an uptrend, the appearance of a Doji star could indicate a slowdown of the bullish momentum, causing traders to exit the market. 

That’s why it is very important to analyze this pattern in tandem with other technical indicators or your specific exit plan. Investors should exit the market only if they confirm Doji indications with other signals and technical indicators. This is because sometimes investors stay indecisive only for a brief period before continuing to push the market in the same direction. For that reason, performing proper analysis of the market is of utmost importance before exiting a trade.

If, however, you decide to make a move, you should always implement a proper risk management strategy to cut losses if the trade doesn’t go your way.
 

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