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What Is Doji Candlestick Pattern? A Complete Guide

Posted by NIFM

The Doji Candlestick Pattern is one of the most basic and significant patterns in terms of relevant technical analysis techniques. For stock traders and investors, recognizing the Doji candlestick pattern can provide a useful indication of market sentiment, suggesting moments of indecision or a potential trend reversal. This complete guide will discuss what a Doji is, as well as its main types, and describe how to use it in your trading strategy.

What Is Doji Candlestick Pattern?

A Doji Candlestick Pattern is a single candlestick that develops when the open and close prices for a security are nearly the same for the period, causing the candlestick to have no or an extremely tiny "real body." It often looks like a cross, plus sign, or an inverted cross.


The essence of the Doji is that the open price, the price moves up and down during the trading session, but closes back at or very close to the open price, representing a state of indecision or balance between buyers (bulls) and sellers (bears). Neither side was able to gain any control at the end of the period.


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Importance of the Doji

  • Indecision: The primary meaning of a Doji is an interim pause or equilibrium in the existing battle of supply and demand. A trader may reference a Doji to indicate that buyers (bulls) and sellers (bears) are relatively even in significance to one another.

  • Potential Reversal: When a Doji candlestick pattern occurs after a prolonged upward or downward price movement, this is a strong indicator of potential exhaustion of the market trend and an indication of possible price reversal. The market seems to be taking a moment to "pause and reflect".

  • Continuation: If a Doji Candlestick occurs within a consolidation phase or choppy market, it simply indicates a confirmation of the existing indecisiveness without anymore information needed regarding the potential of a reversal definition.


Note: A Doji Candlestick is rarely seen in and of itself on a chart pattern. A trader will almost always look for confirmation of this pattern in the following candle or other Technical Analysis Tool (volume or indicator) or key support and resistance levels. For more in-depth reading of a chart pattern, our blog on reading Stock Chart Patterns may be helpful.

Five Main Types of Doji Patterns

The length and position of the shadows (the wicks) lead to different variations of a Doji in candlestick formation (it customarily means three bodies and its wicks or shadows will be either above, below - a dragonfly, or both - a gravestone). Each has its own implication with respect to a trading strategy.


Doji Type

Appearance & Characteristics

Market Implication

1. Standard Doji

Short or non-existent shadows. Looks like a plus sign.

Pure market indecision. Neutral signal.

2. Long-Legged Doji

Long upper and lower shadows, with the open/close near the midpoint.

Significant volatility during the session, but ultimately a stalemate. Stronger indecision signal.

3. Dragonfly Doji

Long lower shadow, with the open, high, and close near the high of the period (T-shape).

Potential Bullish Reversal. Sellers drove the price down, but buyers aggressively pushed it back up. Seen often at the bottom of a downtrend.

4. Gravestone Doji

Long upper shadow, with the open, low, and close near the low of the period (Inverted T-shape).

Potential Bearish Reversal. Buyers pushed the price up, but sellers aggressively pushed it back down. Seen often at the top of an uptrend.

5. Four Price Doji

A thin horizontal line with no shadows. Open, high, low, and close are all at the same price.

Extreme lack of volume or very low volatility. Rare, suggests a highly quiet market.


The major reversal signals generally come from a Dragonfly Doji and a Gravestone Doji. The Gravestone Doji can be viewed as the opposite of the Dragonfly Doji. You can also find out more about additional single candlestick reversals in our blog post on the Shooting Star Candlestick Pattern.

Trading Strategies with the Doji Pattern

To really utilize the Doji Candlestick Pattern more effectively in your trading strategies, you need to incorporate context and confirmation. Here are some helpful ways to bear in mind:

1. Trading the Bullish Reversal (Dragonfly Doji)

  • Context: Look for a Dragonfly Doji at the bottom of a clear downtrend and/or a strong area of support.

  • Interpretation: The long lower wick indicates that the market rejected lower prices, which tells us there is strong buying pressure.

  • Entry: Look for a confirmation candle, which should be a strong bullish candle, as long as it closes above the open or high of the doji candle, immediately after the Doji. Then that is when you would enter long (buy) after the confirmation candle closes.

  • Stop-Loss: Your stop-loss order on this trade would be placed below the lowest part of the long lower wick of the Dragonfly Doji.


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2. Trading the Bearish Reversal

  • Context: Look for a Gravestone Doji at the high point in an uptrend or a significant resistance level.

  • Interpretation: The long upper wick indicates that the market rejected higher prices, and aggressive selling has entered the market.

  • Entry: Wait for a confirmation candle. A confirmation candle is a strong bearish candle that closes below the open/low of the Doji candle, and it must go off right after the Doji finishes forming. You will enter a short (sell) position after the confirmation candle closes.

  • Stop-Loss: Place a stop-loss order just above the high point of the Gravestone Doji long upper wick.


It is important to have proper risk control. Take the Risk Management Course for a full understanding of managing risk in the market so you can properly manage your losses and make adjustments as needed.

3. Combine Doji with other indicators

The confidence level with any Doji Candlestick Pattern will increase drastically when confirmed by any technical analysis tool.


  • Volume: A Doji that is formed on a high-volume trading day indicates that the bulls and bears fought it out harder, and adds some weight to the indecision or reversal signal.

  • RSI/Stochastics: If a Doji pattern appears following an uptrend, along with an RSI showing to be overbought, this would also support the Doji pattern, indicating a bearish reversal. Conversely, you could see a Doji following a downward trend, with an RSI stating it was oversold and would signal a bullish reversal.

  • Moving Averages: A Doji that is located near a prominent moving average (like the 50-day or 200-day SMA, or EMA) that is acting as support or resistance can be a substantial confirmation signal. Our blog on SMA Vs EMA contains more information.


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Doji vs. Spinning Top

Both the Doji Candlestick Pattern and the Spinning Top are signals of market indecision, but they differ structurally:


Feature

Doji Candlestick Pattern

Spinning Top

Real Body Size

Extremely small or non-existent (Open and Close are virtually equal).

Small, but clearly visible real body (Open and Close are distinct).

Shadows (Wicks)

Can have varying wick lengths (short, long, or only one) depending on the type.

Usually has moderate-sized upper and lower shadows.

Indecision Level

Represents a perfect or near-perfect balance (stalemate) between buying and selling forces.

Represents indecision where neither side wins decisively, but a clear price range was covered.


In summary, a Doji indicates a more complete stalemate where the market closes exactly the same as the market opening price, while the Spinning Top pattern indicates indecision and a slight, but inconsequential, closing price above or below the opening price. Both patterns lend motive for caution and indicate possible trend changes.

Conclusion

The Doji Candlestick Pattern is a tremendously useful pattern for any stock market trader over the longer term who understands technical analysis. While it symbolizes indecision by the market, there are many variations of the unique Doji pattern that also imply indecision, most notably the Dragonfly Doji and Gravestone Doji, which suggest potential trend reversals in price movement. The unique Doji Candlestick pattern can be utilized in trading analysis to establish potential areas of exit or entry into the trade by simply urging the trader to always confirm what price action occurs subsequently in relation to volume and/or technical indicators.

If you have the opportunity to learn more about the Doji pattern in Technical Analysis, advance your education by taking a look at our full learning path, starting with the Technical Analysis Crash course, and continue your journey toward your goal of becoming a profitable trader with our Stock Market Online Classes.

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