Introduction

Every candlestick on the price chart has four sets of data which helps an analyst in determining its shape and understanding the price behavior.

These four sets of data include the low, high, close, and open prices of a candle.

A stock whose closing price is higher than the opening price will have a green candle and vice versa.

One such important candlestick pattern is Doji. Let us look at the shape of a Doji and understand its impact on the price of a stock.

What is a Doji?

It is a single candlestick pattern where the opening and closing prices are equal. Doji looks like a cross or a “+” sign.

Despite a strong price movement throughout the trading session, the closing price is equal to the opening price

This pattern is formed when there is indecision in the market. Neither the buyers nor the sellers are in control of the prices.

Both buyers and sellers try to change the direction of prices with equal force but they fail eventually. 

How to identify a “Doji” pattern?

A Doji candle looks similar to a pair of horizontal and vertical lines that intersect with each other.

Doji patterns can form anywhere on the chart. It can appear during an uptrend or a downtrend. It may also appear when the market is neutral.

Types of Doji patterns 

Based on the market conditions and open/close line, Doji can be described in various types:

1. Standard or Neutral Doji 

This is the most common Doji pattern. It appears when there are an equal number of buyers and sellers in the market. 

This pattern indicates uncertainty in the future movement of prices.

2. Gravestone Doji

A gravestone Doji has a long upper wick. This tells us that buyers pushed the prices higher during the day but it was not long before the sellers came in and took control.

It looks like an inverted “T”.

3. Dragonfly Doji

This pattern is the opposite of gravestone Doji. The sellers try to push the prices low during the day but soon enough the buyers come in and push back the price closer to the opening price.

It looks like the alphabet “T”.

4. Long-Legged Doji

This Doji pattern has long upper and lower wicks due to extreme highs and lows during the day. 

It indicates indecision between buyers and sellers and signals a price breakout which may form a new trend.

Trading Strategy for “Doji” pattern

A Doji candlestick is a neutral indicator. It provides no information regarding the price movement in the future.

Firstly, the occurrence of a Doji pattern is a rare phenomenon and when it does occur, it does not guarantee that the price will move in the expected direction.

However, in most cases whenever a Doji is spotted it has resulted in a trend reversal. If the previous trend was an uptrend, the formation of a Doji pattern has led to a bearish trend reversal.

But this pattern alone is not a reliable indicator. It has to be combined with other technical indicators like Relative Strength Index and Moving Average to predict accurate outcomes.

Conclusion

Estimating the risk-reward from a Doji pattern can be a difficult task as it does not provide any price targets.

A trader should never risk his hard-earned money without having adequate knowledge of how to use different candlestick patterns depending upon the market conditions.

Backtesting a trading strategy is a good way of improving the odds in your favor.

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