A Doji is a technical analysis pattern characterised by a candlestick with a short body, indicating equal or nearly equal opening and closing prices. It is often represented by a plus sign, a cross, or an inverted cross. This pattern suggests indecision or a lack of clear directional bias in the market.
What is Doji candle pattern?
The Doji candlestick pattern is formed when the opening and closing prices of a security are the same (or nearly the same). So, the real body of the candle is simply a horizontal line, and the Doji looks like a cross or a plus sign.
Since the opening and closing prices are so similar (or the same), a Doji indicates a period of indecision in the market — when the price opened at a particular point, travelled to different highs and lows and then closed at the same point it opened.
Types of Doji candlestick patterns
Although the Doji candle primarily focuses on two price metrics (namely the opening and closing prices), a candle also reveals two other details — the high and low prices during the session. Depending on the levels of these four price metrics, we have five different types of Doji candles, as outlined below.
1. Gravestone Doji
A Gravestone Doji is a candlestick pattern characterized by a long upper shadow, a small body, and a negligible lower shadow. This pattern suggests indecision and potential bearish reversal. Buyers were initially active but subsequently retreated, allowing sellers to push the price back to the opening level.
2. Bearish Gravestone Doji
The most common variant is the bearish Gravestone Doji, often observed near market tops. In a downtrend, a Gravestone Doji signals a potential exhaustion of the upward pullback. Following this pattern, a renewed downward price movement typically confirms the bearish dominance.
3. Long-Legged Doji
A Long-Legged Doji features a small body and extended upper and lower shadows, indicating indecision and a lack of clear direction. The significant price swings during the period suggest a battle between buyers and sellers, with neither side gaining a decisive advantage.
4. Star Doji
Star Doji patterns, including bullish and bearish variants, are typically observed after a trend reversal. These patterns signal a potential change in market sentiment and can be used to identify potential trend reversals.
5. Bearish Doji Star
A Bearish Doji Star appears after an uptrend and resembles a plus sign. The pattern is confirmed if the price subsequently declines, indicating a bearish reversal. The "star" characteristic requires the body to be higher than the previous candle's.
6. Bullish Doji Star
A Bullish Doji Star, also known as a Morning Star Doji, appears after a downtrend and resembles a plus sign. The pattern is confirmed if the price subsequently rises, indicating a bullish reversal. The "star" characteristic requires the body to be lower than the previous candle's.
7. Hammer Doji
A Hammer Doji is a candlestick pattern shaped like a hammer, typically observed after a price decline. It features a small body, a long lower shadow, and a negligible upper shadow. This pattern suggests a potential reversal, with buyers entering the market near the bottom.
8. Dragonfly Doji
A Dragonfly Doji is a candlestick pattern characterized by a long lower shadow, a small body, and a negligible upper shadow. It signals a potential bullish reversal, as buyers dominate the market and drive the price back to the opening level. While a true Dragonfly Doji is rare, minor price variations are often tolerated in practical trading.
How to trade Doji candlesticks?
Doji candlesticks, characterised by their equal-length open and close, often signal potential price reversals. However, their appearance alone is insufficient for immediate action. Traders must exercise patience and wait for subsequent price action to confirm the reversal before entering a trade.
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How to interpret a Doji candle
Interpreting a Doji candle can be quite challenging because it is a single-candle pattern. Unlike patterns that occur over multiple trading sessions, a Doji candlestick only accounts for one trading day. So, to interpret this pattern accurately, it is crucial to take into account the preceding and succeeding trading sessions.
If a Doji occurs at the end of a strong downtrend or uptrend, it may be time to watch out for a possible trend reversal. However, if a Doji occurs in a neutral market, it may be more of a trend confirmation than a trend reversal. It is best to study other technical indicators like moving averages, RSI, MACD, Bollinger bands, and trading volumes to assess the Doji more accurately. Making a trading decision based on a single Doji alone can be a costly mistake.
Additional read: The fear and greed index
Doji candlestick vs spinning top: The key differences
A Doji candle is often mistaken for a spinning top and vice versa. However, the two are different patterns. The primary difference is the size of the real body. In a Doji candle pattern, the real body is extremely small or non-existent; it makes up less than 5% of the candle’s total size. In a spinning top, the real body is visible but small because the opening and closing prices are quite close to one another.
Here is a preview of the differences between the Doji and the spinning top patterns.
Particulars |
Doji |
Spinning top |
Size of the body |
Extremely small or non-existent |
Small, but larger than the real body of a Doji |
Difference between the opening and closing prices |
There is very little difference between the two prices; typically zero |
There is a small difference between the opening and closing prices |
Variants of the pattern |
5 variants available for the Doji |
No distinct variations for the spinning top |
Conclusion
It is easy to misinterpret the appearance of a Doji candle in a chart. If you notice this pattern, make sure you study the candles preceding the Doji and look for other signals like the market trend, trading volume, support and resistance levels, and technical indicators. These will help you make a more informed decision about whether the Doji candle indicates a trend consolidation or trend reversal.
