What is the Doji candle pattern?

A doji candlestick is a short-term pattern made of a single candle. Doji translates as “the same thing” from Japanese. It’s the perfect name for a candle that has its open and close prices at the same or almost the same level, making the body of a doji candle very small.

The reason for this is the balanced power of bulls and bears, with neither being in control. Dominated by wicks, a doji candle often indicates indecision in the market.

This type of candlestick can be classified as both a reversal and continuation pattern. The signal doji provides depends on the shape of a candle and its positioning within the trend.

Types of doji candles

Analysts distinguish five types of doji patterns:

• Doji Star (Neutral)
• Four-price doji
• Long-legged doji
• Gravestone doji
• Dragonfly doji

Doji star candlestick pattern (neutral doji)

A doji star candle looks like a cross with a very short body in the middle and both wicks of similar length. This type of candlestick can occur at the end of the downtrend or in the closing stages of the uptrend. This may signal the trend weakening and a potential upcoming reversal.

Four-price doji

The four-price doji is a very rare formation that looks like a horizontal line with high, low, opening and closing prices at the same, or nearly the same, level. This doji pattern signals very low volatility and high indecisiveness in the market. Similar to the neutral doji, the four-price doji may indicate the trend weakening.

Long-legged doji candlestick pattern

A long-legged foji, or a ‘rickshaw man’, is similar to a doji star but has longer wicks on either side. This type of candle also signals indecision as there is no clear indication about the future trend but with much higher volatility on the market.

A long-legged doji candlestick formation can occur in both strong uptrends and downtrends, suggesting that the current trend may be in the closing stages, and a reversal may take place soon.

Gravestone doji candlestick pattern

A gravestone doji candle has a very long upper wick and a considerably shorter lower wick, with the candle’s body located close to the bottom.

It is a bearish reversal pattern that often takes place at the end of the uptrend. The gravestone doji suggests that the bulls have pushed the price higher but could not force a close near the candle’s high price. As a result, the bears were able to return the price lower, bringing the open, close, and low prices to almost the same level, which may indicate the impending reversal of the price direction.

On the other hand, when found in the downtrend, the gravestone doji may indicate its continuation.

Dragonfly doji candlestick pattern

A dragonfly doji candlestick formation is the opposite of a gravestone doji.

It’s a bullish signal with a very long lower wick, a much shorter upper wick, and the body located closer to the top. Thus, in a dragonfly doji candle, the open, high, and close prices are all very close to each other.

This type of candle can occur in both uptrend and downtrend, but it is considered to be stronger when it takes place at the bottom of the downtrend and often suggests an upcoming price reversal.

How to trade with the doji candlestick

The doji candle alone is usually not strong enough to provide a definitive trading signal, so it is often used in combination with other technical analysis tools to support the findings.

Support and resistance level are some of the most commonly used tools with a doji candle. For example, on the image below, you can see a gravestone doji that closed near the resistance level of the uptrend. It means that the higher price was rejected, and bears pushed the price to stay within the trend channel. Since bears had slightly more control over the market, they kept pushing the price down, causing the trend to change its direction.

Another way to trade with a doji candle is to spot two consecutive doji candles, which usually means even greater indecisiveness on the market. When two candles appear one after another in a trend channel, it often results in a trend reversal.

One more popular method of trading with a doji candle is to use it with the RSI oscillator. As you can see on the image below, doji candles appeared in the uptrend, signalling indecisiveness. At the same time, RSI suggests the instrument is overbought. These two factors resulted in the trend reversal

These are just a few examples of potential positions with doji candles. Keep in mind that the appearance of these candlestick patterns does not guarantee trend reversal or continuation – it is merely an indication. That’s why using risk management tools is crucial to prevent unexpected losses should the market move in the opposite direction of your prediction.

Create a demo account to practise trading with doji candles, stop loss and take profit. Ready for more technical analysis tools? Move to our next article, where we explain how the hammer and inverted hammer chart patterns work.