The Doji is a candlestick pattern that can occur in both bullish and bearish trends and indicates indecision in the market. It has an average reliability and can be identified as follows:
- The opening price and closing price are equal or nearly equal.
- In a classic Doji the upper and lower tail are relatively short and equal or nearly equal.
Doji Pattern Interpretation
There are actually several types of Doji, as the Long Ledgged Doji, which will be analyzed in other articles on the subject, but in this section we deal only with the classic Doji.
The Doji is a candlestick that indicates indecision in the market, where there is a balance or draw of power between buyers and sellers so there is no prevailing price movement in one direction or another.
If a Doji is formed in a trading range (a market with no clear trend), it will have no relevance so it should not be taken into account. However, if it is formed in a market with a strong trend and in its most advanced stage, we must pay close attention to this pattern. For example, if during a pronounced upward trend a Doji occurs after a large white candle, this may be a sign that the trend is running out. Conversely, if the Doji is formed after a big black candle in a pronounced downward trend, this is also a sign of a possible exhaustion of the trend.
Despite this, the Doji should not be used alone as a trading ignal to open positions in the market. In this case, it is advisable to wait for confirmation during the next session once it has fully formed following candlestick as the Doji can occur in the middle of a market trend and therefore may constitute only a temporary stop in the current trend. In some cases these temporary stops are the starting point of strong moves in the direction of the prevailing trend.. The Japanese call this as "The market has cooled."
An important consideration is how to really know whether or not we are really seing a Doji specially when we have a candle which opening and closing price are not exactly equal. In this case, it is recommendable to analize hte previous candlestick of the period that is being studied. If there are many candlesticks of this type in the chart with similar closures and openings it is best not to consider them as Doji.
Another important aspect with respect to Doji is that as in other patterns based on Japanese candlesticks, within the limits of their tails there are formed the respetive tops and bottoms, ie resistances and supports according to the prevailing trend. This means that in a bullish trend a Doji is always a resistance and in a bearish trend it acts always as a support.