The Doji Candlestick Pattern & Its Variations

Oct 04, 9:58 am
Doji candlestick

The doji candlestick pattern is one of the simplest and easiest of all candlestick patterns. While traders often tend to pay a lot of attention to other candlestick patterns, mastering the doji candlestick pattern and understanding it’s significant in a trend is, in fact, all that you need. The doji candlestick can be misunderstood when reading this candlestick pattern in isolation. However, when you combine other aspects such as trend, the fundamentals, and even your favorite indicators, the doji candlestick can help you to not only understand what was happening with the prices but more importantly, what can happen with prices in the future as well.

The doji candlestick pattern

The doji is one among many candlestick patterns. But it is significant because this single candlestick pattern can tell you a lot about the market than using a two or even a three candle pattern.

The doji candlestick visually stands out from the rest. It is marked by the open and close prices are staying the same with distinctive highs and lows being formed. There are different types of doji patterns:

  • the doji
  • long legged doji
  • gravestone doji
  • dragonfly doji

There are other variations as well to the doji pattern, but all the variations are more or less the same.

Types of doji candlestick patterns
Types of doji candlestick patterns

Depending on the asset that you are trading, you may or may not see a textbook doji (where open = close). For example, a cursory check on EURUSD from January 01, 2016 to date shows only two instances where the daily price closed in a perfect doji (open = close). Therefore, when looking for the doji pattern, traders need to leave some flexibility.

Understanding the market sentiment with the doji

As you might have already heard, the doji pattern signals an indecision in the markets, meaning that neither buyers or sellers are willing to push prices further, despite the intraday session posting a high and low from the open. This typically signals that traders are awaiting further clues on the fundamentals. When a doji candlestick appears, it simply means that there is a temporary pause in the prevailing trend. Price can continue to push higher or lower following the doji candlestick. Therefore, whenever a doji candlestick appears, traders should be cautious for a potential shift in the sentiment.

The chart below shows some of the doji candlestick patterns which tell a story when used within the market context.

Doji candlesticks – Market sentiment
Doji candlesticks – Market sentiment
  1. This doji appeared within a previous downtrend. Following the close below the doji’s low two sessions later, price continued to push lower
  2. Here, a long-legged doji was formed, but the next session closed bearish resulting in a new lower low forming
  3. Another long legged doji followed by a strong bullish candlestick indicating the upside momentum
  4. Doji formed after the pullback to the previous uptrend. A bullish close above the doji signaled further upside
  5. A doji coming off a bearish candlestick and another bearish session indicated that sellers were in control
  6. A bullish close above the doji high saw prices posting a new local high
  7. Another doji after the bullish candlestick but prices closed lower despite a new high forming, indicating a shift in trend
  8. Doji after a strong bearish candlestick followed by a bullish close, triggers near-term upside in prices
  9. Doji, after a local rally, sees prices subsequently pushing lower

Trading the doji candlestick pattern

The easiest way to practice trading with the doji candlestick pattern is to look for the following pattern.

For a sell scenario, look for a previous strong uptrend (more significant if this uptrend is marked by strong bullish candlesticks). Look for price to make a doji pattern at the top followed by a bearish candlestick close below the doji’s low. (Ideally, this reversal candlestick should have a lower high than the doji’s high).

The opposite holds true for a buy scenario. Wait for a strong downtrend followed by a doji and a bullish close above the doji high.

These rules can be further validated by any of your favorite technical indicators; Bollinger Bands, moving averages, PSAR, etc.

Doji, used with Stochastics & moving average
Doji, used with Stochastics & moving average
Doji, used with Bollinger Bands
Doji, used with Bollinger Bands
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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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