Definition
Doji is a candlestick pattern with the same opening and closing price on the chart. It represents the indecision in the market and sideways market conditions.
When a doji candlestick forms on the chart, it confirms to the retail traders that the institutions and banks are making decisions. The number of buyers is equal to the number of sellers. Until the doji candlestick breakout, the price will continue to move sideways. The direction of the doji breakout will decide the future trend in the market.
In this article, I will explain the doji candlestick along with its types in detail so that, in the end, it will improve your basics for the Strat Trading strategy.
How do you find the Doji candlestick on the chart?
As a doji represents the same opening and closing price, it will not have a body theoretically, but in an actual trading chart, the doji candlestick can have little to no body and only wicks/shadows.
To find the Doji candlestick on the chart:
- First, confirm a candlestick with almost the same opening and closing price.
- It must have long upper and lower shadows/wicks
- The colour of the body does not matter in doji candlestick; it can be green or red.
Remember that in actual trading, it is infrequent that a candlestick’s opening and closing price will be the same. That’s why you should use an approximate value. For example, if the candlestick’s body is 10% to 15% compared to its total range, it will be considered a doji.
Types of doji candlestick
Three major types of doji candlesticks are based on the opening and closing price.
- Long legged doji
- Gravestone Doji
- Dragonfly Doji
Long legged doji
It is a type of doji candlestick of the same length as the upper and lower shadow/wick. The opening and closing prices will also be the same and form in the middle of the candlestick, showing an equal number of buyers and sellers.
Long-legged doji candlestick make a range market structure on the lower timeframe. The high price of long-legged doji will act as resistance, and the low will act as a support level.
The long-legged doji represents a neutral trend. After this type of candlestick is formed, the price will either continue the previous trend or reverse the trend.
Gravestone Doji
It is a type of doji candlestick in which the opening and closing prices are the same but form in the lower 30% of the total range of candlesticks. In the gravestone doji, the upper wick/shadow is significantly larger than the lower shadow/wick.
When the gravestone doji forms at the end of a bullish prior trend, it forecasts a bearish trend reversal. Trend changes from bullish to bearish. However, if it forms within the ranging market structure, it will represent the indecision in the market like the long-legged doji.
Dragonfly Doji
It is a type of doji candlestick in which opening and closing prices are the same; however, they will form in the upper 30% of the total range of candlestick. It is opposite to the gravestone doji. In the dragonfly doji, the lower wick/shadow is significantly larger than the upper shadow/wick.
Dragonfly doji pattern mainly acts as a bullish trend reversal candlestick pattern is formed at the end of a bearish trend. However, it acts as an indecision candlestick when it forms within a range or choppy market structure.
The psychology behind the formation of doji candlestick
In simple words, doji candlestick tells the retail traders that the market is looking for direction. No any decision has been made by big traders. Price is moving sideways.
Retail traders mainly trade the trend, especially in the strat trading, so we will capture the trend from the starting point. That’s why it’s essential to stay away during a doji candlestick formation: there’s no trend in the market.
The doji candlestick breakout will decide whether the market will continue the previous trend or reverse.
Price always moves in the form of impulsive and retracement waves. The doji candlesticks represent the retracement waves, and the big candlestick shows the impulsive waves.
The price always has to pause after the trend. Because it’s natural, after a pause, a big trend will form again; after the trend, a price pause will occur, and this process continues. It will pause, market makers will decide the future direction, and the next trend will form.
There, Doji is a decisive candlestick pattern.
Why is it important to learn about Doji in the Strat Trading?
In the strat patterns trading, we read the candlesticks to learn the market psychology and make different decisions about closing, holding, or opening a trade.
For instance, imagine you’re holding a trade in a bullish trend and a doji candlestick forms. This signals that the trend may either reverse or continue. If the doji breaks in a bullish direction, you’ll be able to confidently hold the trade, potentially leading to a longer and more profitable position. This understanding of the doji candlestick empowers you to make informed trading decisions.
The bottom line
In conclusion, doji candlestick represents indecision and equilibrium in the market where neither buyers nor sellers are in control. Both buyer and seller’s forces are almost equal, keeping the price stable at one price, and the price keeps moving like a tug of war with no results.
So once a doji candlestick forms the chart, you’ll first have to know its location; it may form after a bearish trend, a bullish trend, or a ranging market structure. Then, you must confirm the breakout and forecast the future direction.
Remember, the key to improving your trading skills is continuous learning and practice.
Now you’ll have to practice the doji candlesticks on the live trading chart with at least 100 screenshots and then observe the market reaction during forming this pattern. This backtest will help you a lot.
If you have any questions or need further clarification, don’t hesitate to comment below. I’m here to provide the support and guidance you need to understand and apply the doji candlestick pattern effectively.