Studying candlestick patterns in the prices of assets traded in the stock market is a commonly employed method of predicting trends and formulating a trading strategy. There exist a number of different candlestick patterns that indicate various possible directions the market may be inclined towards when viewed along with an assortment of other data.
One such candlestick formation is the doji pattern. A doji is a pattern that occurs in a session of trading where the opening and closing price of an asset are almost equal. They are often interpreted as components of larger patterns and do not occur very often under normal circumstances. The word ‘doji’ itself means ‘blunder’ or ‘mistake’ in Japanese due to the scarcity of instances where the open and close prices are almost exactly the same. The formation of a doji pattern may indicate a sense of indecisiveness in the market where neither buyers or sellers are able to gain the upper hand.
There are several types of doji candlesticks and for the most part, they tend to look like a cross or a plus sign and have virtually nonexistent bodies with relatively larger shadows. Different types of doji patterns may occur in consolidation periods, prior to price reversals or continuation trends depending upon prevailing market conditions.
Types Of Doji Patterns:
The information that can be gleaned from recognizing this pattern is contingent on the context of its occurrence and may vary depending upon the different types of doji candles encountered. There are five commonly defined types of doji candlesticks that indicate different trends and market climates:
- Standard Doji/Doji Star: Standard doji candlesticks may not explicitly indicate applicable data on market trends when viewed on their own. However, when viewed in the context of prevailing trends, it may indicate a change in the direction of the market. If the doji formation is preceded by a bullish candlestick, it may indicate an uptrend while a bearish one below the pattern’s low (with a lower high than that of the doji) may be a call to sell. Conversely, a downtrend may be followed by these types of doji which could then be succeeded by a bullish candlestick in a buy scenario.
- Gravestone Doji: These types of doji candles have long upper shadows with negligible lower wicks and may indicate that while buyers succeeded in raising prices at first, they failed to sustain this trend at the close. If it occurs during an uptrend – particularly at the resistance or Fibonacci retracement level – it may signal a bearish reversal trend. Conversely, if it occurs on a downtrend at the support level, it may indicate a bullish reversal.
- Dragonfly Doji: Dragonfly doji are the opposing scenario to gravestone doji with long lower wicks and minute upper shadows. They may appear at the top or bottom of uptrends or downtrends respectively and could indicate a change in market direction. The miniscule upper shadow indicates that the price did not rise above the open throughout the session. When they form at the bottom of a bearish trend, they often function as a bullish signal.
- Four Price Doji: This type of doji is characterized by a single straight line with no upper or lower extensions as prices did not move either way throughout the course of the session. It may signify a high degree of indecision or a quiet market where the high, low, open and close are all at the same level which gives the pattern its name.
- Long Legged Doji: In these types of doji candlesticks, there are greater extensions of the wicks on either side of the chart’s body indicating that the price varied greatly throughout the session, with stiff competition between buyers and sellers. However, neither of these groups were able to dominate the market resulting in the formation of a long-legged doji. Emphasis is given to the position of the closing price with respect to the midpoint of the wick when analyzing these types of doji candles. If the close is above the midpoint, it may resemble a bullish pin bar and could signal an uptrend if it occurs close to the support levels for the asset. The reverse scenario may signal a bearish pin bar if it forms at the resistance levels.
Conclusion
Different types of doji may serve as useful indicators of trend reversal when spotted at the back end of uptrends or downtrends. However, they may not be as strong a signal when they occur at the initial stages of the trend. In such cases, they may simply signify indecision. It is also important to note that if the previous trend continues after a doji, it acts as a fake reversal pattern that may encourage you to continue an existing trade. It is also important to consider prevailing market conditions and other parameters for analysis when using doji patterns to conduct trades.
