How to Trade the ‘Doji’ and ‘Doji Variations’

Doji
The Doji is one of the most informative signals in Candlestick trading and is comprised of one candle. It forms when the open and close occur at the same level (or very close) in a specific timeframe. In order for a doji signal to be valid it must meet two conditions. First, the open and the close of the stock must be almost at the same price level (as stated above) and second, there must be an upper shadow or a lower shadow, or both. When a doji candlestick is formed, a cross formation appears (as seen above) with the horizontal line representing the open and close occurring at the same level. The vertical line on the doji candlestick chart represents the total trading range during that timeframe. This clearly indicates that the bulls and the bears are at an equilibrium signifying a state of indecision. When this occurs the trader should keep an eye out for a trend reversal.

Doji lines are patterns in the doji candlestick chart with the same open and close price. There are three special types of Doji lines explained below.

 
Doji Variations

1) Long-legged Doji – This doji line has a long upper and lower shadow with the price in the middle of the range. It is a very important reversal signal and it signifies a great amount of indecision in the market. It is formed when prices trade well over and below the day’s opening price, but then close almost at the same level as the opening price.

2) Dragonfly Doji – This doji line has a long lower shadow and no upper shadow and it indicates a bearish trend reversal. This type of doji opens at the high of a session, has a significant inter period decline, then it climbs back up closing at the same level as the open.

3) Gravestone Doji – This doji line has a long upper shadow and no lower shadow and indicates a bullish trend reversal. It is derived by the formation of the signal looking like a grave stone and is formed when the open and close occur at the low of the day. Its specialty is for calling market tops and it could indicate imminent disaster for a stock.

Japanese candlesticks provide real time depiction of market sentiment and is a leading indicator due to its ability to provide early warning alerts to possible price movements. The Japanese say that whenever a doji appears, always take notice. Familiarity with the trading characteristics of the doji candlestick chart can take the guesswork out of investing.

Continue your Japanese Candlestick education and read about the bullish engulfing pattern.