A doji candlestick, also called a doji star, shows the indecision between buyers and sellers in the cryptocurrency market. This type of candle is confirmed on a technical analysis chart when the opening and closing prices are almost identical.
What is a doji pattern on a candlestick chart?
In simple terms, Doji shows that buyers and sellers of an asset meet each other. By doing so, any attempts by buyers to raise the price by sellers are thwarted. Likewise, buyers frustrate efforts to reduce sellers’ prices.
In the end, both parties push the price to a pivot level. So, for example, when Bitcoin (BTC) opens and closes at $20,000 on a given day, even though its price fluctuates between $25,000 and $15,000 over a 24-hour period.
Therefore, the $25,000 price level – or the intraday high – represents the upper wick of the doji, and the $15,000 price level – the intraday low – represents the lower wick of the candle.
How does a doji candle work?
Doji candlesticks have historically helped traders anticipate the bottoms and tops in the market with the calm before the storm.
For example, a doji that forms during an uptrend can indicate bullish exhaustion, i.e. more bulls moving to the side of the sellers, which usually leads to a trend reversal.
It is worth noting that the Doji pattern does not necessarily mean that there will always be a trend reversal. Instead, it shows indecision among traders about future directions.
Therefore, it is best to confirm the Doji candlestick signal with the help of additional technical indicators. For example, a technical indicator such as the Relative Strength Index (RSI) and/or Bollinger Bands can give more weight to what the Doji pattern suggests.
Types of Doji Patterns and How to Trade Them
Doji patterns can vary depending on the position and length of the shadow. These are the most common forms:
A neutral doji
Neutral Doji consists of a candlestick with a nearly invisible body located in the middle of the candlestick, with the upper and lower wicks of similar lengths. This pattern appears when the bullish and bearish sentiments are in balance.
Traders can combine a neutral doji with momentum indicators such as the RSI or the Moving Average Convergence Divergence (MACD) to help identify potential market tops and bottoms.
For example, the occurrence of a neutral Doji in an uptrend in conjunction with an overbought RSI (>70) may indicate an imminent market correction. Similarly, the occurrence of a candle in a downtrend when the RSI is oversold (
Long legged doji
A long-legged doji has longer wicks, which indicates that buyers and sellers tried to aggressively control price action at some point during the candle’s time frame.
Traders should watch the candlestick’s closing price carefully when identifying a long-legged Doji pattern.
It should be noted that the Doji is a bearish signal if the closing price is below the middle of the candlestick, especially if it is close to the resistance levels. On the other hand, if the closing price is above the middle of the candle, it is bullish because the pattern is similar to a bullish pin bar pattern.
If the closing price is in the middle, it can be considered a trend continuation pattern. In this case, you can always refer to the previous candles to predict future trends.
Dragonfly Doji
Dragonfly Doji appears as a T-shaped candle with a long lower wick and almost no upper wick. This means that the opening and closing price and the high price are almost at the same level.
If the Dragonfly Doji pattern forms at the end of a downtrend, it can be considered as a buy signal as shown below.
On the other hand, the occurrence of the candle during an uptrend indicates a possible reversal.
Doge’s Tombstone
Tombstone Doji represents an inverted T-shaped candlestick, the opening and closing of which coincide with the bottom. The candle indicates that the buyers tried to push the price higher but they were unable to sustain the bullish momentum.
When the Tombstone Doji appears in an uptrend, it can be considered a reversal pattern. On the other hand, its occurrence in a downtrend indicates the possibility of an upward pullback.
Four doji price
The Four Price Doji is a pattern that rarely appears on a candlestick chart except in conditions of low volume or very short periods. Remarkably, it looks like a minus sign, indicating that all four price indicators (open, close, high, and low) are at the same level over a given period.
In other words, the market did not move during the period covered by the candle. This type of Doji is not a reliable pattern and can be ignored. It just shows a moment of indecision in the market.
How reliable is the doji candlestick pattern?
The Doji candlestick pattern may not provide the strongest buy or sell signals in technical analysis and should probably be used in conjunction with other metrics. However, it is a useful market signal to consider when assessing the degree of indecision between buyers and sellers.
Building a trading strategy based on Doji candlestick patterns is best suited for intermediate or experienced professional traders who can easily identify and accurately interpret given signals.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making a decision.
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