Doji

The Doji is a very special and powerful Japanese candlestick. It has almost the same opening and closing price which gives it a specific shape.

Dojis are significant on markets that are liquid enough and on time units that are superior to 30min.

Depending on the position of the opening-closing line compared with the range of the day, the Doji will have different names:

• The Water Bearer (or long-legged Doji) has two long shadows and an opening-closing level that is situated almost in the middle of the range. It is even more powerful than a Doji with short shadows.

• The Gravestone Doji has an opening-closing level that is close to the highs of the session which makes it look like a Shooting Star.

• The Dragon Doji is the opposite of the Gravestone Doji. Its opening-closing level is close to the lows and it looks like a Hammer.

• The High Wave is a candlestick that has a very short body and is not exactly a true Doji.

The Doji reveals the indecision of the market and they are to be taken into account when they appear on the tops or the bottoms. In an uptrend, a Doji shows that buyers could not make prices stay in a higher zone; the trend is thus running out of steam on this level.

The same goes for a downtrend but it is less obvious than in an uptrend since a market can collapse on its own, because of its own weight whereas it can only rise thanks to new buyers (except on the forex where the behaviour remains the same, be it in a rise or in a fall).

On this chart, we can see all kinds of Dojis. The 1st one is almost a Gravestone Doji (it should normally have no body at all but this one is so short that it can be considered as one).

It is all the more interesting since it appears on a high after a gap. The next Japanese candlestick creates a Bearish Engulfing and prices fall dramatically. The 2nd Doji is a Water Bearer that shows the indecision on this price level. The 3rd and 4th Dojis are Dragon Dojis that show that the market cannot fall anymore.

The 2nd, 3rd and 4th Dojis put together form a Tri-Star, which is a very uncommon and powerful reversal pattern. Another Tri-Star can be seen in zone 5. After a last bullish attempt, prices from a new Doji, which reveals that they cannot rise higher and the market is folding back afterwards.

A Doji appearing in the middle of a trend should not necessarily be seen as a reversal signal, if it is the only signal around, but rather as a signal that the trend is likely to pause. In an uptrend, one could take advantage of this signal in order to collect gains if the Doji appears in an upper price zone or to take a new long position if the Doji appears in a lower price zone (the same way in which one collects gains below a resistance and one takes a position above a support).

If a Doji appears on a price extreme, it can be seen as a trend reversal signal, especially of it is a Gravestone Doji on a top or a Dragon Doji on a bottom.

It may also be interesting to observe Dojis as support and resistance levels since they show price zones that prices could pierce momentarily without staying within.