The Doji candlestick is one of the most recognizable patterns in technical analysis. It signals market indecision and often precedes significant price movements. Understanding how to identify and trade Doji patterns can give you a meaningful edge in the markets.
What is a Doji Candlestick?
A Doji candlestick forms when a security's open and close prices are virtually equal. This creates a candle with a very small or nonexistent body, with shadows (wicks) extending above and below. The pattern represents a battle between buyers and sellers where neither side won decisively.
Visual Description: A Doji looks like a cross or plus sign on your chart. The horizontal line represents the open and close at nearly the same level, while the vertical lines (shadows) show the high and low of the trading period.
Types of Doji Patterns
Not all Doji candles are created equal. Each type provides different insights into market sentiment:
1. Standard Doji
The classic Doji has a small body in the middle with shadows of roughly equal length on both sides. This shows balanced indecision between bulls and bears.
- Open and close are nearly identical
- Upper and lower shadows are similar in length
- Indicates pure market indecision
2. Long-Legged Doji
This variation has very long upper and lower shadows with the open and close in the middle. It shows extreme volatility during the session but ultimate indecision.
- Very long shadows on both sides
- Indicates high volatility and uncertainty
- Often appears at market turning points
3. Dragonfly Doji
The Dragonfly Doji has a long lower shadow with no upper shadow. The open, close, and high are at the same level. This is considered bullish, especially after a downtrend.
- Long lower shadow, no upper shadow
- Resembles a T shape
- Bullish signal at bottom of downtrends
4. Gravestone Doji
The opposite of the Dragonfly, this pattern has a long upper shadow with no lower shadow. The open, close, and low are at the same level. This is considered bearish, especially after an uptrend.
- Long upper shadow, no lower shadow
- Resembles an inverted T
- Bearish signal at top of uptrends
5. Four Price Doji
A rare pattern where open, high, low, and close are all the same price. This appears as a horizontal line and indicates extreme indecision or very low volume.
How to Trade Doji Candlesticks
A Doji alone is not a trading signal. Its significance depends on context, particularly the trend leading up to it and the confirmation that follows.
Doji in an Uptrend
When a Doji appears after a sustained uptrend, it can signal that buying momentum is weakening. Watch for bearish confirmation.
Trading Example: Bearish Reversal
Stock XYZ has rallied from $50 to $65 over two weeks. A Doji forms at $65.
The next day, a bearish red candle closes below the Doji's low.
This confirms the reversal. Traders might short or exit long positions, targeting the $60 support level.
Doji in a Downtrend
When a Doji appears after a sustained downtrend, it can signal that selling pressure is exhausting. Watch for bullish confirmation.
Trading Example: Bullish Reversal
Stock ABC has fallen from $100 to $75 over three weeks. A Dragonfly Doji forms at $75.
The next day, a bullish green candle closes above the Doji's high.
This confirms the reversal. Traders might buy, targeting the $85 resistance level.
Key Rules for Trading Doji Patterns
- Always wait for confirmation: Never trade based on the Doji alone. Wait for the next candle to confirm the direction.
- Consider the context: A Doji after a strong trend is more significant than one in a ranging market.
- Check volume: Higher volume on the Doji adds to its significance.
- Look at support and resistance: Doji patterns at key levels are more reliable.
- Use proper risk management: Place stop losses beyond the Doji's high or low.
Combining Doji with Other Indicators
Doji patterns become more powerful when combined with other technical tools:
Doji + RSI
- Doji at overbought RSI (above 70) = stronger bearish signal
- Doji at oversold RSI (below 30) = stronger bullish signal
Doji + Support/Resistance
- Doji at resistance after uptrend = potential reversal down
- Doji at support after downtrend = potential reversal up
Doji + Moving Averages
- Doji at key moving averages (20, 50, 200 MA) adds significance
- Price reaction after Doji often respects these levels
Common Mistakes to Avoid
- Trading every Doji: Most Doji candles in ranging markets are meaningless. Focus on those after clear trends.
- Ignoring confirmation: Entering trades before the confirming candle leads to many false signals.
- Forgetting the bigger picture: A Doji on a 5-minute chart is less significant than one on a daily chart.
- Setting tight stops: Doji patterns can have high volatility. Give your trades room to work.
Doji Pattern Success Rates
Based on historical studies, Doji patterns show these approximate reversal rates:
- Standard Doji at trend extremes: 50-55% reversal rate
- Dragonfly Doji after downtrend: 55-60% bullish reversal rate
- Gravestone Doji after uptrend: 55-60% bearish reversal rate
- Long-legged Doji at key levels: 50-55% reversal rate
These rates improve significantly when combined with other confirming factors like support/resistance and volume.
Track Your Doji Pattern Trades
Pro Trader Dashboard helps you analyze which candlestick patterns work best for your trading style. See your win rate by pattern type.
Summary
The Doji candlestick pattern signals market indecision and potential trend reversals. Different types of Doji (standard, long-legged, dragonfly, gravestone) provide varying insights into market psychology. Always wait for confirmation before trading, consider the context of the preceding trend, and combine Doji signals with other technical indicators for better accuracy. Remember that Doji patterns are most meaningful after sustained trends and at key support and resistance levels.
Learn more: Hammer candlestick and Shooting star pattern.