A Doji is a type of candlestick pattern commonly used in technical analysis of financial markets, particularly in trading stocks, forex, and cryptocurrencies. It represents indecision in the market and typically occurs when the opening and closing prices of an asset are nearly the same, resulting in a very small or nonexistent body on the candlestick chart.
Key Characteristics of a Doji:
- Small or No Body:
- The Doji candlestick has a very small body, meaning the difference between the opening and closing prices is minimal. In some cases, the open and close are exactly the same, resulting in no body at all.
- Longer Upper and Lower Shadows:
- The upper and lower shadows (or wicks) of the Doji can vary in length, indicating that prices fluctuated above and below the opening price during the trading session but eventually settled back near the open.
- Indecision Signal:
- A Doji typically signifies indecision in the market. Neither buyers nor sellers are in control, leading to a stalemate. This can signal a potential reversal or continuation of the current trend, depending on the context of other indicators and candlestick patterns.
Types of Doji Patterns:
- Standard Doji:
- A basic Doji has equal upper and lower shadows, indicating equal uncertainty in both upward and downward directions.
- Gravestone Doji:
- The Gravestone Doji has a long upper shadow and little to no lower shadow, suggesting that buying pressure was strong during the session but ultimately failed, leading to a close near the open.
- Dragonfly Doji:
- The Dragonfly Doji has a long lower shadow and little to no upper shadow, indicating that selling pressure was strong but buyers managed to push the price back up to the open.
- Long-Legged Doji:
- This Doji has long upper and lower shadows, showing significant volatility and indecision during the session.
Significance in Trading:
- Reversal Indicator: In some cases, a Doji can signal a potential reversal of the current trend, especially if it occurs after a strong uptrend or downtrend. Traders often look for confirmation from subsequent candlesticks to validate a reversal.
- Continuation Signal: In other contexts, particularly during a period of consolidation, a Doji may indicate that the market is pausing before continuing in the current direction.
Example:
If a stock opens at \$50, trades as high as \$55 and as low as \$48 during the session, but closes at \$50, the resulting candlestick would be a Doji. This indicates that despite the volatility during the day, the market could not decide on a clear direction, ending where it started.
