Doji candles

A doji tells traders that buyers and sellers were balanced at the end of the day, but this may have big implications. If sellers have been dominating and pushing the price down, a doji suggests that the buyers held their ground. Dojis may indicate bullish and bearish​ reversals in an asset’s price.

A candlestick has a thick body marking the opening and closing prices. If the close is above the open, the candle is coloured white or green. If the open is below the close, the candle is coloured red or black. The tails or thin lines above and below the body of the candle mark the high price and low price recorded during the time period of the candle. Each candlestick chart pattern says something about the strength of the buyers and sellers within this timeframe. A long green daily candlestick may indicate that the buyers were strong that day, whereas a long red candle may indicate that sellers were strong.

Candlestick traders use this information to make decisions and devise trading strategies​​. To find out what each type of doji means, we can look at where the high and low points are and where that doji occurs within the trend.

Technical analysis​​ is the field of studying chart patterns and price movements to determine where the price of an asset may go next. Technical analysis helps to provide information, which can hopefully then be turned into a profitable trade. Before analysing doji candles, traders may ask themselves some questions that relate to the context of the candlestick trade:

Some common doji candlestick chart patterns include the dragonfly doji, gravestone doji, long-legged doji, star doji, and hammer doji. Each has a slightly different shape, which we discuss in more detail below.

A dragonfly doji candlestick pattern is created when the open, high, and close price of a candle are the same or very close to the same, but the low is much lower than these other three prices. A true dragonfly doji is rare. Most traders allow for slight discrepancies between the prices.

Essentially, a dragonfly suggests that the price opened and dropped, but by the close, the price was back up at the open. It lets traders know that there was weakness early in the day, but by the end of the day, the price had recovered, indicating the strength of the bull market. Below is a dragonfly doji on a US SPX 500 index chart.

A gravestone doji pattern is the dragonfly doji flipped upside down. The opening price, low, and close are nearly the same, but the high price is much higher. A gravestone doji shows that buyers were strong early on, but by the close, they’d given up all the gains and sellers pushed the price all the way back to the open.

A long-legged doji occurs when the open and close are nearly the same price, but there are extreme highs and lows during the period, creating long tails. A long-legged doji pattern indicates indecision because neither the bulls nor bears make any real progress, despite strong moves both up and down during the period.

After a strong advance, this type of indecision could mean that the bulls are losing control, from a bearish long-legged doji. A price move lower following the pattern could induce traders to enter short positions. After a strong decline, a long-legged doji candlestick could indicate that the bears have lost momentum. A move higher following this pattern could induce traders to take long trades.

If the price is moving sideways overall, or consolidating, the long-legged doji may confirm that the traders still are not sure which way to go. It helps to confirm that sideways movement may continue.

The price chart below shows a long-legged doji candlestick pattern, which could help to signal a short-term top following a brief rally. Since this candle shows a small difference between the open and close price, it is also called a spinning top.

Star doji candlestick patterns can come in two forms: there is a bullish doji star and a bearish doji star. Both appear after either an uptrend or downtrend in the price of an instrument and help to signal different directions of trend​​​​.

The hammer doji candle occurs after a price decline and is shaped like a hammer. Hammer doji candlesticks are created when the price opens, falls, then closes near the opening price. The pattern signals that buyers are hammering in at the bottom.

Hammers doji patterns frequently occur. The below price chart for the UK 100 index shows several patterns that occurred near bottoms. Following the hammer, the price should move higher, which helps to confirm the pattern. On three of the examples, the price does move higher, and on one example, it does not.

If a hammer pattern occurs after a price advance, it is called a hanging man, and could signal a possible reversal if the price proceeds lower after it.

Trading any type of doji candlestick pattern requires patience and the ability to wait for confirmation. The appearance of one of these doji candles alerts traders of a possible price reversal, but until that occurs, most traders leave the pattern alone.

Doji candles are short-term patterns. They mostly occur over one period and can therefore only indicate what the price may do in the short-term, rather than helping to signal long-term changes in trends. A price reversal following a doji could last a long time, or only a few periods. Trading doji candlesticks is a constant task of analysis, since each new candle provides information.