A Doji is a candlestick pattern that indicates indecision or a standoff between buyers and sellers. It forms when the opening and closing prices are very close to each other, resulting in a candlestick with a very small body and often long upper and lower shadows. The shape of a Doji resembles a cross or plus sign.
(Fig 1.5 - Doji)
The interpretation of a Doji depends on its context within the price action:
In an uptrend or downtrend, a Doji may signal potential exhaustion of the trend and a possible reversal, especially if it occurs after a series of bullish or bearish candles respectively. If the subsequent candle is a strong candle in the other direction, then there is a high chance that the trend might have reversed.
In a sideways or range-bound market, a Doji or a series of Dojis suggest continued indecision and lack of a clear direction.
The pattern becomes more significant when it forms at or near support or resistance levels after a prolonged trending move and at reasonable higher volume than the preceding candles.
Types of Dojis : There are several types of Dojis that are commonly known as Long Legged Doji, Dragonfly Doji and Gravestone Doji. They differ in the position of the real body relative to the upper and lower wick. Typically, they have a bigger range than a standard, neutral Doji and are more likely to cause a trend reversal if they occur after a significant trend.
(Fig 1.6 - Different Types of Dojis)
A Long Legged Doji has long upper and lower wicks with the real body almost in the middle of the range. It signifies a fierce battle between bulls and bears and is more likely to cause a trend reversal particularly if it happens at a higher volume after a significant uptrend or downtrend.
A Dragonfly and a Gravestone Doji resemble a strong hammer and a reverse hammer respectively with a very small real body. If they occur after a prolonged trend, they are very likely to result in a trend reversal because they signify exhaustion of the existing trend and shift of momentum.
Please click on "Next Post" to move to the next candlestick pattern - Inside Bar including a Bullish or Bearish Harami.
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