Doji Candlestick - How to Trade the Doji Candlestick Pattern
By Stelian Olar , Updated on: Nov 03 2023.
As a new Forex trader looking at charts, you've probably come across some funky-looking candlesticks that don't seem to make sense.
What's up with those lines that look like a cross or plus sign?
Those are Doji candlesticks, and while they may look strange at first, they actually reveal key insights into market indecision that can inform your FX trades.
Doji candlestick patterns form when the open and close prices of a currency pair, stock, or cryptocurrency are virtually equal for a given timeframe. This pattern signals a tug-of-war between buyers and sellers, with neither side strong enough to push the price up or down.
The result is a standstill - almost like the market needs to take a breather before deciding which way to head next.
In this beginner's guide, we'll walk through:
- The Doji candlestick meaning.
- The psychology behind its formation.
- The major types of Doji candlestick patterns you're likely to encounter like the reversal Doji candlestick, dragon fly Doji candlestick, and 2 Doji candlesticks in a row.
We'll look at real chart examples so you can see Dojis in action and understand the candlestick Doji meaning so you'll learn how to spot them, interpret what they mean, and use them to make smarter FX trades.
Let's dive in and demystify the art of Doji candlestick pattern trading!
What is a Doji Candle
In technical analysis, Doji candlestick also known as the Doji star is a unique price formation that signals indecision in the market. It is characterized by open and close prices that are virtually equal, creating a cross-like shape on the chart.
"Doji" derives from Japanese, meaning "equal thing," “identical,” or “same.”
And equal they are!
This equality signifies a great struggle between bulls and bears, buyers and sellers, and supply and demand with neither able to triumph on the price “battlefield” illustrating uncertainty in market direction.
All Doji candlesticks frequently occur at market tops and bottoms or at major swing highs and lows acting as a reversal pattern. Their emergence at the end of a trend hints that a trend reversal may be on the horizon. However, Dojis can also be viewed as trend continuation patterns in some instances, representing a pause before the trend resumes.
Doji Candlestick Pattern Explained
As a new trader, you're used to seeing candlesticks with a solid body - that rectangle part representing the range between the open and close. But in a candlestick Doji, that body is virtually non-existent.
That's because the open and close are equal, creating that thin horizontal line that gives the Doji its signature cross or plus sign shape. This shows that neither buyers nor sellers could gain control and push the price up or down.
Doji Candlestick Pattern
The result is a standstill, aptly captured by the Doji's lack of body.
As a new trader, interpreting the meaning of a doji candlestick is crucial to leveraging its signals.
So how exactly do you "read" this unique candlestick chart pattern?
Hot to read Doji Candlestick Patterns?
Visualizing how the doji forms gives insight into why it represents market indecision.
For a Doji to form, there's typically a battle between the bulls and bears throughout the day. The price may move up after the open, but get pushed back down later and then the bulls rally to bring the price back near the open by the close.
The order could also reverse, with bears dropdown prices first before bulls push it back up to the opening price. Either way, the end result is a close right back where the candle started, signaling balanced tension between buyers and sellers.
Top 5 Types of Doji Candlesticks
If you look closely at Doji candlestick patterns, you'll notice they come in different shapes and sizes based on the wick's length. Let's walk through the most common Doji candlestick types:
- Standard Doji candlestick
- Long legged Doji candlestick
- Dragonfly Doji candlestick
- Gravestone Doji candlestick
- Four-price Doji
This is the classic Doji with a thin cross-like body in the middle and wicks of similar length on either end that opens and closes near the same price level. It shows balanced sentiment between buyers and sellers.
The long legged Doji has longer wicks, telling us there was aggressive buying and selling during the period. The long wicks reflect the battle between bulls and bears. This is neither a bullish Doji candlestick nor a bearish Doji candlestick pattern.
Long legged Doji
The dragonfly Doji is shaped like a "T", with a long lower shadow with the open, close, and high all near the same spot. It shows the bears tried to push prices down but failed. The dragonfly Doji pattern acts as a bullish reversal Doji candlestick at the end of a downtrend while the bearish dragonfly Doji candlestick acts as a sell signal.
Dragon fly Doji Candlestick
The opposite of the Dragonfly, this Doji has a long upper shadow. It shows the bulls tried and failed to lift prices higher so the gravestone is a powerful bearish Doji candlestick if it shows up at the end of an uptrend.
This is a straight horizontal line like the “-“ sign showing the open, close, high, and low were all equal. It reflects the ultimate uncertainty in the market.
Four Price Doji
So in summary, Dojis come in different forms, but they all express indecision between buyers and sellers. Learning to recognize the types of Dojis will make you a better chart reader!
Other Doji Variations
Here are some additional Doji candlestick patterns variations for beginner traders:
Multiple Doji in a row
For example, 2 green Doji candlestick in a row shows the tug-of-war between buyers and sellers continuing for another candle period. 3 Doji candlestick in a row and even 4 Doji candlestick in a row reflect very balanced forces and a consolidation pattern.
Bearish Doji star candlestick pattern
This bearish reversal pattern starts with an uptrend candle followed by a doji gaping up. It signals a potential trend reversal down. The bearish Doji star can be the middle candle of an evening star pattern consisting of three candlesticks.
Bullish Doji star candlestick pattern
This reversal begins with a downtrend candle followed by a Doji gaping down. This Doji star is a bullish pattern if it’s the middle candle of a morning star Doji candlestick pattern if confirmation occurs.
2 Green Doji Candlestick in a Row
Intra-day Doji Formations
As a new trader, sometimes the daily or weekly charts don't tell the whole story behind a doji candlestick. For a more detailed picture, you need to drill down to shorter time frames.
The real action happens on the lower intraday timeframes - that's where the battle between bulls and bears unfolds. Analyzing the 5-minute, 15-minute, or 1-hour charts can provide more clues about the shifting dynamics behind a Doji candle.
Bullish Doji Candlestick Pattern
Let's walk through an example on the 15-minute USD/JPY chart. We'll follow the price action leading up to a daily Doji candle.
In the morning, bullish sentiment prevails initially. Prices rally after the open but during the New York session bears took control and USD/JPY sold off.
As the trading day nears the close, bulls re-emerge and push prices back up to the same level as the open. This round-trip price action forms the cross-shaped Doji candle on the daily chart.
How to Trade the Doji Candlestick Pattern
The Doji candle presents some interesting opportunities for savvy traders. Let's explore a few strategic ways to trade when this indecisive candlestick emerges:
- Range Trading - The market indecision indicated by a Doji means range-bound conditions may follow. Consider using range trading tactics like selling at resistance and buying at support.
- Breakout Trading - Watch for the breakout direction following a Doji and trade in that direction. A break above Doji highs signals bullish breakout, while a break below Doji lows signals bearish momentum.
- Reversal Trading - If a Doji forms at trend turning points, look to enter a reversal trade in the opposite direction of the prior trend. Use other confirming indicators to boost accuracy.
- Options Strategies - Sell options after Doji forms, benefiting from time decay if prices trade sideways. Consider naked puts or calls, credit spreads, iron condors, and other options plays.
- Scalping - The unpredictability of Dojis offers scalpers quick short-term trades around the pattern. Use tight stops and capture small profits as price whipsaws around the opening level.