What is Doji Candle: How to Trade with Doji Candlestick Pattern

The Doji Candle is a type of candlestick pattern used for technical analysis of trend reversals in the market. Traders can study the past price movements through the Doji candlestick to forecast the future prices of a currency pair and place successful trades in the forex market. Since the Doji Candlestick patterns consist of open and close prices of a currency pair, they can help you in confirming a potential high or low price point. Let’s take a look at what a Doji candle is and you can use it for placing more successful trades.

 

What is a Doji Candle?

Doji Candlestick represents a virtually equal open and close price of a currency pair, signifying the indecision or equality between the bulls (buyers) and bears (sellers). The patterns formed by a Doji Candlestick often look like a plus, cross or inverted cross sign. The Doji Candlestick is usually found at the top or bottom of a particular trend and hence sends signals of possible bullish or bearish reversals.

• The vertical line of the Doji Candlestick is called the wick.
• The horizontal line is called the body.
• The top portion of the Doji Candlestick refers to the high price point of the currency pair.
• The bottom-most portion of the Doji Candlestick refers to the low price point of the currency pair.
• The horizontal line, body, represents the difference between the open price and the close price of the currency pair. When the closing price is more than the opening price, it is shown as a green bar, and when the opening price is more than the closing price, it is represented as a red bar.

How is the Doji pattern formed?

The Doji Candlestick pattern is formed whenever the forex market opens at a price and the bullish traders (who expect the prices to rise) make a constant effort of pushing the prices up by purchasing more of the currency pair, whereas the bearish traders (who expect the prices to fall) reject the increasing prices and push it back down by either selling the particular currency pair or by not entering the forex market at all. This situation forms a negating effect between the buyers and sellers of the currency pair in the forex market and leads to the closing and opening prices being similar to each other. The Doji Candlestick represents a state of ‘rest’ as the bulls and bears fight each other to keep the prices at levels that suit them the best. Often, Doji shows an upcoming reversal in the price that indicates both the buyers and sellers gaining momentum over a certain period of time. For example, you are trading USD/GBP, which opens at $100. As both buyers and sellers enter the market, the buyers try to push the currency pair’s price up by buying more of the currency pair. However, the sellers reject this price increment and start selling their currency pair in the market to keep the prices low. Hence, USD/GBP hits a high of $107 and a low of $95, but closes at $102. This creates a Doji Candlestick pattern with the opening and closing prices similar to each other but still benefits the traders by closing at $2 more than the opening price.

 

Is a Doji bullish or bearish?

Doji Candlesticks can be either bullish or bearish, indicating bearish or bullish reversal signals, respectively.

 

Bullish Doji Candlestick

A bullish Doji Candlestick pattern like a Dragonfly Doji or Doji Star occurs during a downtrend where the opening and closing prices of the currency pair are equal to each other, forming a plus sign. As soon as the currency pair price moves above the previous Doji, a bullish reversal is confirmed, and traders receive a signal to buy the trade due to the expected uptrend.

 

Bearish Doji Candlestick

A bearish Doji Candlestick pattern like Gravestone Doji occurs during an uptrend and includes a double Doji candlestick. The first candlestick is a green candlestick that depicts the opening price of the trading day as lower than the closing price, indicating an uptrend. The second candlestick is a red candlestick that illustrates that the closing price of the currency pair on that day was lower than its opening price, indicating a downtrend. The second candlestick is a long legged Doji, having an extremely long upper wick revealing that the currency pair has a significantly high price, but due to the closing price’s weakness, the high price is rejected and a downtrend is confirmed. Traders receive a signal to sell or short the trade due to the expected downward market movement.

 

Example of Doji chart pattern

Let us consider that you want to trade USD/EUR trading at an exchange rate of 2 with the Doji chart pattern.

The USD/EUR market is currently in a downtrend, and the market closes at the same exchange rate of 2 at which it opened. The next trading day, the currency pair opens at 2.1 and sends an uptrend reversal signal. A few minutes after opening, the currency pair trades at 2.4. At this point, since the currency pair price rises above the previous day’s Doji to form a Doji candlestick above the initial candlestick, it confirms the uptrend reversal and signals you to place buy orders at 2.4 due to the expected rising market.

When you buy USD/EUR at 2.4, the market starts increasing thereafter, and the currency pair trades at 2.8, 3, 3.5, and 3 before finally closing at 3.8, significantly above the opening price of 2.1, enabling you to make profits in the uptrend.

 

Different Types of Doji Candle

Standard Doji pattern

The standard Doji Candlestick pattern is a single Candle that indicates the closing price, opening price, high price and low price of a currency pair. It has two short wicks which are equal in length from top and bottom. It indicates the currency pair prices moving in a very short range, indicating extreme indecision in the market.

Long-legged Doji

The long-legged Doji has a larger length extension of the Candlestick’s vertical line, both below and above the horizontal line. This indicates the currency pair prices moving dramatically over a timeframe but closing almost at the same price where it opened. When trading with the long-legged Doji, you can place the stop-loss order at the top of the upper wick to minimise losses.

 

 

 

Gravestone Doji

The Gravestone Doji appears when the currency pair’s price opens and closes at the lowermost end of the price range. This means, as soon as the currency pair price opened at a certain level, the buyers pushed the prices up but were not able to maintain the bullish momentum till the market closed.

Dragonfly Doji

The Dragonfly Doji is the exact opposite of the Gravestone Doji. It appears either at the bottom of a market downtrend or at the top-most of a market uptrend, and it signals the potential change in market direction as the price closes at the most extreme of the vertical bar. This indicates that the currency pair prices did not go beyond the opening price, signalling a bullish trend reversal with a highly extended lower wick.

 

 

4 price Doji

The 4 price Doji Candlestick pattern is a horizontal line that does not have a vertical line either above or below it. This signifies a very indecisive market as all the high, low, open and close prices are the same. It also indicates a quiet market and is generally seen with currency pairs that have a low trading volume.

Red vs. Green doji: What do they indicate?

 

Indication

The green doji indicates that the closing price is slightly above the opening price, suggesting a slight bullish sentiment. Even though it signals indecision, it shows that buyers had a marginal edge by the close. 

The red doji indicates that the closing price is slightly below the opening price, suggesting a slight bearish sentiment. It still shows indecision but reflects that sellers had a slight upper hand by the end of the session.

Psychological implication

A green doji may show that buyers attempted to take control but did not have significant strength, which could imply hesitation among bulls. If this doji appears after a downtrend, it might suggest buyers are stepping in, and a reversal could be possible. 

In contrast, a red doji indicates sellers tried to dominate but lacked the power to push prices significantly lower. It might show waning buying power and potential for a reversal when seen after an uptrend.

Reinforcement in patterns

When a green doji candlestick pattern appears in bullish continuation patterns, it may reinforce that there is still upward momentum, albeit cautiously. For example, it might show indecision before another push upward. 

On the other hand, when a red doji appears in bearish patterns, it could reinforce exit pressure or suggest that buyers are hesitant. It might signal a pause before a continuation downward.

Impact of placement on trends

A green doji in an uptrend might signal a brief pause or hesitation in the trend, where bulls are reassessing before a continuation. 

In contrast, a red doji in a downtrend could indicate that sellers have been dominant but are losing momentum, which might lead to a potential reversal if followed by a bullish confirmation.

Strength of reversal signal

If a green doji forms after a strong downtrend, it can sometimes suggest that buyers are testing the market, potentially leading to a reversal if followed by a bullish confirmation candle. 

In contrast, after an uptrend, a red doji could indicate exhaustion among buyers, potentially signaling the beginning of a downturn if confirmed by subsequent bearish price action.

Volume considerations

A high-volume green doji suggests significant purchasing interest and potential strength in a reversal or continuation signal. Red dojis with high volume indicates heavy exit pressure or indecision in the market, which can suggest a more significant potential for a bearish reversal.

Role in specific patterns

When combined with other candlesticks, green dojis can be part of bullish patterns like the Morning Star. Conversely, red dojis are often seen in bearish reversal patterns, such as the Evening Star, when they appear at the top of an uptrend followed by a bearish candle.

Emotional insight

The green doji shows slight optimism but is coupled with caution, suggesting buyers are active but uncertain. In contrast, the red doji reflects slight pessimism and hesitancy, suggesting sellers are present but not overwhelmingly dominant.

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How to read doji candlestick patterns in technical analysis

Identify the doji candlestick

To identify a doji candlestick, look for one with a small or non-existent body where the prices of opening and closing are nearly identical. The wicks (shadows) of the candlestick can vary in length, indicating the range of price movement within the session. Ensure that the doji stands out from the surrounding candlesticks, as it signals a period of indecision in the market.

• Uptrend: If a doji forms after a series of bullish candlesticks, it may indicate that the uptrend is losing momentum, potentially signaling an upcoming reversal.
• Downtrend: If a doji appears following a series of bearish candlesticks, it may suggest that exit pressure is weakening and buyers could be stepping in.
• Sideways/consolidation: A doji within a consolidating market often reflects continued indecision and signals that a breakout may be on the horizon.
  
  

Check for confirmation

• If a doji at the bottom of a downtrend is followed by a strong bullish candlestick, it confirms a potential upward reversal.
• If a doji at the top of an uptrend is succeeded by a strong bearish candlestick, it signals a potential downward reversal.

Avoid taking action based solely on the appearance of a doji; wait for the next candlestick to confirm the pattern's indication.

Examine support and resistance levels

Review significant support and resistance levels in the context of the doji –

A doji that forms at a key support level during a downtrend or at a resistance level during an uptrend strengthens the potential for a reversal signal. This analysis helps determine whether the doji indicates a potential reversal or a continuation of the current trend.

Analyze trading volume

Check the trading volume associated with the doji –

• A doji with high volume suggests substantial market activity, adding weight to the potential reversal or continuation signal.
• A doji with low volume might indicate that the signal is less reliable and could reflect temporary indecision rather than a significant shift.

Formulate the trading strategy

• Entry point: Only enter a trade after a confirming candlestick closes. For example, if a bullish candlestick follows a doji at the bottom of a downtrend, consider entering a long position and vice versa.
• Stop-loss levels: To manage risk, set stop-losses just below the low of the doji for bullish signals or just above the high for bearish signals.
• Gain target: Use nearby support and resistance levels or prior swing highs/lows as potential gain-taking points.

Monitor and adjust

After entering a trade, monitor market conditions to ensure they align with trading expectations. If the market shows signs of moving against the anticipated direction, be prepared to exit early to minimize potential losses.

*This is an example only to enhance a consumer's understanding of the strategy being described above and is not to be taken as Blueberry providing personal advice.

 

Types of doji

Neutral doji

A neutral doji is the standard or basic form of a doji candlestick. It appears when the opening and closing prices are almost identical, with roughly equal upper and lower shadows. This type of doji indicates that long and short traders are equally matched and there is no clear directional movement in the market. It suggests uncertainty and a balance between opposing market forces.

The neutral doji's significance depends on its position within the broader trend –

• In an uptrend, a neutral doji may signal that the bullish momentum is losing strength, and a potential reversal could be on the horizon.
• In an uptrend, a neutral doji may signal that the bullish momentum is losing strength, and a potential reversal could be on the horizon.
• In a sideways market, it often just reflects ongoing indecision without a strong directional implication until confirmed by subsequent price action.

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How to trade with the Doji Candlestick pattern?

1. Create a forex account

The first step toward trading with the Doji Candlestick pattern is to open a forex account with a regulated forex broker. Look for forex brokers like Blueberry who have the right certifications and offer various tools that help you trade in the forex market. Once you find a platform that suits your requirements, provide the broker with the necessary documents to get the account started.

2. Choose the currency pair(s) you want to trade

After opening a forex account, analyse the currency pairs trading in the market and their historical price movements. Choose the currency pair(s) you want to trade based on their past performance and potential future market direction.

3. Monitor currency pair prices with a Doji Candlestick pattern

Apply one of the top candlestick patterns, Doji, to monitor the current market price movement once you decide the currency pair(s) you want to trade. The placement of the Doji Candlesticks will provide you with long or short signals in the market, on the basis of which you can decide your next trading step.

4. Enter with a Doji Candlestick

When the Doji Candle is at the bottom of a market downtrend, it indicates a possible bullish reversal. As soon as the price signal is confirmed after the closing and opening price are almost the same, you can trade for a long position and buy the currency pair.

5. Exit with a Doji Candlestick

After staying in the position for some time, when the Doji Candlestick is at the top of a market uptrend, it indicates a possible bearish reversal. As soon as the price signal gets confirmed, you can trade for a short position and sell your currency pairs to exit the market and minimise any possible losses.

*This is an example only to enhance a consumer's understanding of the strategy being described above and is not to be taken as Blueberry providing personal advice.

 

What does a Doji tell traders?

A Doji Candlestick helps traders in technical analysis by indicating that there is an upcoming reversal in the market. It tells the price at which a currency pair has opened, at which it has closed and the subsequent low and high prices of the same. A bearish Doji indicates a downtrend reversal, and a bullish Doji indicates an uptrend reversal, enabling traders to make short or long trade decisions accordingly.

 

What is the difference between a Doji and a Spinning Top?

Both Doji and Spinning Top are reversal signals that indicate the current market direction changing. The difference between the two is that Doji Candlesticks are comparatively smaller in size with smaller lower and upper wicks. However, Spinning Top has larger bodies with longer upper and lower wicks. Hence, Doji Candlesticks are better used when the closing and opening prices of a currency pair are equal or near to each other. The size of the wicks in Doji Candlesticks is also small because it indicates that there is not a massive difference between the high and low price of the currency pair currently. Doji also often appears as a plus sign, whereas spinning top appears as any other candlestick.

 

Trade with the Doji Candlestick pattern to maximise profits

The Doji Candlestick pattern sends possible signals about a trading opportunity, indicating the right exit and entry points in the forex market. Our trading platform provides you with several indicators that you can combine together to make the most accurate trading decisions that maximise your profits and minimise your losses. Sign up for a live trading account or try a demo account.