The Doji candlestick, also called a Doji star, shows indecision between buyers and sellers in the cryptocurrency market. This type of candlestick is confirmed on a technical analysis chart when the open and close prices are almost identical.
What is a Doji pattern on the candlestick chart?
In simple terms, a Doji shows that the buyers and sellers of an asset offset each other. Thus, attempts by buyers to push the price up are thwarted by sellers. Similarly, sellers’ efforts to push prices down are thwarted by buyers.
Ultimately, both parties bring the price to a pivot level. So, for example, when Bitcoin (BTC) opens and closes at $20,000 on a given day, even if its price fluctuated between $25,000 and $15,000 over the given 24-hour period.
Therefore, the price level of USD 25,000 – or the intraday high – represents the upper wick of the Doji, and the price level of USD 15,000 – the intraday low – represents the lower wick of the candle.
How does a Doji candle work?
Historically, Doji candlesticks have helped traders predict market lows and highs as a kind of calm before the storm.
For example, A Doji candlestick that forms during an uptrend could signify bullish exhaustion, i.e. more buyers moving to the sellers side, which usually leads to a trend reversal.
It is valid to note that the Doji pattern does not necessarily mean that a trend change will always occur. Rather, it shows indecision among traders about future trends.
Therefore, it is better to confirm the Doji candlestick signal with the help of additional technical indicators. For example, a technical indicator like the RSI and/or Bollinger Bands can give more weight to what the Doji pattern suggests.
Types of Doji Patterns and How to Trade Them
Doji patterns can vary based on the position and length of the shadow. These are the most popular variations:
neutral doji
Neutral Doji consists of a candlestick with an almost invisible body located in the center of the candlestick, with the upper and lower wicks of similar lengths. This pattern appears when bullish and bearish sentiments are balanced.
Traders can combine neutral Doji with momentum indicators such as RSI or Moving Average Convergence Divergence (MACD) to help identify potential market highs and lows.
For example, the appearance of a neutral Doji in an uptrend coinciding with an overbought RSI (>70) could indicate an impending market correction. Similarly, the appearance of the candle in a downtrend when the RSI has become oversold (
long-legged doji
The long-legged doji has longer wicks, which suggests that buyers and sellers have tried to take control of the price action aggressively at some point during the candle’s time frame.
Traders should keep a close eye on the closing price of the candlestick when identifying a potential long-legged Doji.
In particular, Doji is a bearish signal if the closing price is below the middle of the candle, especially if it is close to resistance levels. Conversely, if the closing price is above the middle of the candle, it is bullish, as the formation resembles a bullish bar pattern.
If the closing price is right in the middle, it could be considered a trend continuation pattern. In this case, you can always refer to previous candles to predict future trends.
Doji Dragonfly
The Dragonfly Doji looks like a T-shaped candlestick with a long bottom wick and almost no top wick. It means that the open, close and high price are almost at the same level.
If the Doji Dragon pattern forms at the end of a downtrend, it can be considered a buy signal, as shown below.
Conversely, the appearance of the candlestick during an uptrend indicates a possible trend reversal.
Doji Tombstone
A Tombstone Doji represents a candlestick in the shape of an inverted T, with the open and close coinciding with the low. The candlestick indicates that the buyers tried to push the price higher but were unable to sustain the bullish momentum.
When the Tombstone Doji appears in an uptrend, it can be considered a reversal pattern. On the other hand, its appearance in a downtrend indicates a possible retracement to the upside.
four price doji
The Four Price Doji is a pattern that rarely appears on a candlestick chart, except in low volume conditions or very short periods.. In particular, it looks like a minus sign, which suggests that all four price indicators (open, close, high, and low) are at the same level over a given period.
In other words, the market did not move during the period covered by the candlestick. This type of Doji is not a reliable pattern and can be ignored. It just shows a moment of indecision in the market.
How reliable is the Doji candlestick pattern?
The Doji candlestick pattern may not provide the strongest buy or sell signals in technical analysis, and should probably be used in conjunction with other metrics. Nevertheless, it is a useful market signal to gauge the degree of indecision between buyers and sellers.
Building a trading strategy based on Doji candlestick patterns is best suited for experienced intermediate or professional traders who can easily and accurately identify given signals.
This article does not contain investment advice or recommendations. All investments and trades involve risk, and readers should do their own research when making a decision.
