What is a Doji Candle & How to trade with it?

Introduction

The Doji candle, also known as the Doji star, denotes the lack of agreement between the bulls and bears of the cryptocurrency or financial market. Notably, this candlestick chart pattern appears when a market’s open and close prices are nearly identical. Numerous Doji patterns exist, such as the long-legged, gravestone, and dragonfly Doji.

Doji candlesticks are frequently used to signify uncertainty because the low, open, high, and close values are all the same.

But not all of these Doji variations are used in the same way. Actually, Doji can also be used to indicate that a current trend is waning. To reduce risks and consistently make a profit, you must comprehend and evaluate the differences between these forms.

What is a Doji Candle?

The word “Doji” means “the same thing” in Japanese, which refers to how uncommon a security’s open and close prices are to match precisely.

Technical analysts think the price is efficient since it reflects all available information about the stock. However, previous price performance does not predict future price performance, and a stock’s current price may not correspond to its actual or intrinsic worth. As a result, technical analysts employ tools to help them sort through the clutter and identify the trades with the highest probability.

A Japanese rice trader named Honma from the hamlet of Sakata invented the candlestick graph in the 18th century. Steve Nison brought it to the West in the 1990s. 

Four types of information are used by every candlestick design to define its shape. Analysts can infer assumptions about price behaviour from this form. A candlestick’s open, high, low, and close serve as its foundation. It doesn’t matter whether a time frame or tick interval is chosen. The body is the packed or hollow bar produced by the candlestick pattern. The shadows are the lines that leave the body. A hollow candlestick will be present on a stock that finishes higher than it did at the start. The body of the candlestick will be filled if the store closes lower. The doji is one of the most significant candlestick formations.

A doji is created when a stock’s open and close prices are almost identical. Doji frequently has little or nonexistent bodies and resembles a cross or plus sign. Doji, from the viewpoint of the auction theory, signifies uncertainty on the parts of both buyers and sellers. As a result of the equal match between buyers and sellers, the price cannot change.

Some analysts see this as a hint of a price reversal. It might also be when buyers or sellers gather steam to continue a trend. Analysts can spot potential price breakouts by looking for doji, frequently observed during periods of consolidation. 

How Does Doji Candlestick Work?

The Doji candle is essential to assess the market situation because most traders rely on past data and current price action for the buy or sell signals. For instance, if a Doji symbol appears during a bullish trend, the market has reached a point of neutrality and hesitation. This may result in the trend continuing or in its reversal.

These signals, however, are not enough to support your decision to sell an investment. Bollinger bands can help what the Doji signal says by utilising a technical indicator like the relative strength index (RSI).

If Bitcoin’s price starts at $55,903, higher buyer demand will result in a price upswing and a high of $57,135. After that, the sellers reduced the price to a record $54,715. However, the day ends with a closing and opening price of $55,903, forming a long-legged Doji, as seen in the image. It denotes that both buyers and sellers are indecisive, indicating that no directional bias exists on that particular day.

How a Doji Candle Forms?

When the market starts, a neutral Doji candle develops, bullish traders, drive higher prices, while bearish traders do the opposite. However, it will eventually run into strong support or opposition; if it takes the opposite course, it will also run into significant resistance. It closes at around the same level as it began towards the end, which suggests a moment of hesitation.

For instance, the market may start higher, but bears may reject the ascent and force the price back down to a predetermined level. As a result, the call returns close to its opening to restore equilibrium. Although this type of Doji is seen as a trend continuation signal, it occasionally portends a reversal.

It’s important to remember that the Doji pattern can merely signify hesitation rather than reversal or continuance. These candles are frequently visible during the lulls that follow significant uptrends or downtrends. After resting, the market might continue on its course.

It may also imply that the current tendency is waning, though. While confirming Doji signals without technical indicators’ support can be challenging, they represent a significant hint of both market bulls and bears.

Types of Doji Candlestick Chart Patterns

Neutral Doji

Since the body of the neutral Doji is situated in the candle’s centre and is almost invisible, the sizes of the top and bottom shadows are similar. When the bullish and bearish sentiments are equal, this pattern appears.

When used alone, it doesn’t offer any particular signal, though. Although reversals might happen relatively frequently after it, traders typically view it as a trend continuation pattern. Investors will take the neutral Doji, which follows a big bullish candle, as a buy signal.

Additionally, a bullish candlestick with a higher low than Doji’s low and an appearance above its high might be a buy signal. For the bearish signal, the opposite is true.

Long-legged Doji

Long-legged Doji’s shadows are longer. Despite their best efforts, neither buyers nor sellers were ultimately successful in controlling the price action at some point throughout the period represented by the candle.

When traders notice this formation, they should keep a close eye on the closing price relative to the midpoint of the entire candle. A negative signal is given if the comparable price is lower than the midpoint, close to resistance levels. The structure resembles a bullish pin bar; thus, if the closing is above the mid-point, it is a purchase signal.

On the other hand, it may be a trend continuation pattern if the closing price is exactly in the middle. Therefore, it is advisable to always look at the preceding candles.

Dragonfly Doji

The Dragonfly Doji’s lower shadow is lengthy, yet the upper shade is nonexistent. According to this, the open, close, and high are all located at the same level. Hence, a T-shaped candle is produced.

Hence, a T-shaped candle is produced. However, traders might start a long position if the price action rises above the high. The Dragonfly Doji is a reversal pattern; thus, traders should close off positions if it appears close to the resistance level.

Gravestone Doji

Gravestone Doji’s open and close prices match the low, in contrast to Dragonfly Doji’s. The result is an inverted “T.” It implies that although the bulls may have raised the price, they ultimately could not maintain their bullish momentum.

The Gravestone Doji can be viewed as a reversal pattern when it appears during an upswing, especially when it is close to a significant resistance level. 

Alternatively, if it emerges during a decline close to a support level, it might be a positive reversal indicator.

The 4 Price Doji

The 4 Price Doji is a rare and distinctive pattern, often seen in low-volume trading or shorter timeframes. It looks like a negative sign, indicating that all four price indicators—high, low, open, and close—were at the same level within a particular period.

In other words, the covered period saw no movement at all in the market. This particular Doji pattern is unreliable and should be disregarded. It only depicts a brief period of market uncertainty.

Double Doji Strategy

A single Doji is regarded as a reliable indicator of uncertainty. However, two Dojis in a row shows a more significant pattern that can result in a decisive breakout. A straightforward Double Doji method exists to capitalise on this protracted hesitation.

Traders might watch for the price to move upward or down after the two Dojis, the breakout direction, and then enter the market. The take-profit targets can be placed close to a recent level of support or resistance. Alternatively, you might set a trailing stop because the new move may extend past the existing license or resistance.

Conclusion

To summarise, the Doji candlestick is not the most delicate pattern to deliver reliable buy and sell signals. However, it excels at identifying pauses in bullish and bearish sentiment that signal open positions or prospective business opportunities.

Since they can quickly identify and understand their indications, it is better suited for experienced and intermediate crypto traders.