The doji candlestick is one of the most important patterns in technical analysis. It signals indecision in the market and often appears at turning points. In this comprehensive guide, we will explain all the doji variations and how to use them in your trading.
What is a Doji Candlestick?
A doji forms when a stock opens and closes at nearly the same price. This creates a candle with a very small or nonexistent body, with wicks (shadows) extending above and below. The pattern shows that buyers and sellers are evenly matched during that period.
Key insight: A doji by itself is neutral. Its significance comes from where it appears on the chart and what candles surround it. A doji after a strong uptrend suggests different things than a doji during sideways movement.
The Four Main Types of Doji Patterns
1. Standard Doji (Neutral Doji)
The standard doji has a small body in the middle with roughly equal upper and lower shadows. It looks like a plus sign or cross on the chart.
What It Signals
The standard doji represents perfect indecision. Prices moved up and down during the session but ended where they started. When this appears after a strong trend, it can signal that the trend is losing momentum.
- After an uptrend: Potential bearish reversal signal
- After a downtrend: Potential bullish reversal signal
- In a range: Continued indecision, wait for confirmation
2. Dragonfly Doji
The dragonfly doji has a long lower shadow with no upper shadow. The open, close, and high are all at the same level at the top of the candle. It looks like a T shape.
What It Signals
During the session, sellers pushed prices significantly lower. However, buyers stepped in and drove prices back up to the opening level. This shows strong buying pressure.
- After a downtrend: Strong bullish reversal signal
- After an uptrend: Less reliable, may indicate continuation
- The longer the lower shadow, the more significant the pattern
3. Gravestone Doji
The gravestone doji is the opposite of the dragonfly. It has a long upper shadow with no lower shadow. The open, close, and low are all at the same level at the bottom of the candle. It looks like an upside-down T.
What It Signals
Buyers pushed prices significantly higher during the session, but sellers took control and pushed prices back down to the opening level. This shows strong selling pressure at higher prices.
- After an uptrend: Strong bearish reversal signal
- After a downtrend: Less reliable, may indicate continuation
- Often forms at resistance levels
4. Long-Legged Doji
The long-legged doji has very long upper and lower shadows with a small body in the middle. It shows extreme volatility during the session with neither side winning.
What It Signals
This pattern shows major indecision with high volatility. Prices swung wildly in both directions before closing near the open. It often appears during important market events or at major support and resistance levels.
- Signals extreme uncertainty in the market
- Often precedes significant price moves
- Wait for the next candle to determine direction
How to Trade Doji Patterns
Doji patterns are most effective when you follow these guidelines:
Step 1: Identify the Trend
A doji is most significant when it appears after a clear trend. Look for at least 5-10 candles moving in one direction before the doji forms.
Step 2: Check the Location
Dojis that form at support or resistance levels are more meaningful. A gravestone doji at resistance or a dragonfly doji at support adds confluence to your analysis.
Step 3: Wait for Confirmation
Never trade a doji in isolation. Wait for the next candle to confirm the reversal. For a bullish reversal, you want to see a strong green candle following the doji. For a bearish reversal, look for a strong red candle.
Trading Example
Stock XYZ has been in an uptrend for two weeks and is approaching a known resistance level at $50.
- Day 1: Price reaches $50 and forms a gravestone doji
- Day 2: A large red candle closes below the doji low
- Entry: Short position below the confirmation candle
- Stop loss: Above the high of the gravestone doji
- Target: Previous support level or 2:1 risk-reward
Common Mistakes to Avoid
- Trading every doji: Most dojis are noise. Only trade those at significant levels after trends
- Ignoring volume: A doji with high volume is more significant than one with low volume
- No confirmation: Always wait for the next candle before entering a trade
- Wrong timeframe: Dojis on higher timeframes (daily, weekly) are more reliable than on 5-minute charts
Doji Patterns Combined with Other Indicators
Doji patterns become more powerful when combined with other technical tools:
- RSI: A doji with RSI above 70 or below 30 adds confirmation
- Moving averages: Dojis at the 50 or 200-day moving average are significant
- Fibonacci levels: Dojis at key retracement levels signal potential reversals
- Volume: Higher volume on the doji day indicates stronger indecision
Track Your Candlestick Pattern Trades
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Summary
Doji candlesticks are powerful reversal signals when used correctly. The standard doji shows general indecision, the dragonfly doji suggests bullish reversal potential, the gravestone doji indicates bearish reversal potential, and the long-legged doji signals extreme volatility. Always look for dojis after trends, at key levels, and wait for confirmation before trading.
Ready to learn more candlestick patterns? Check out our guides on hammer patterns and engulfing patterns.