What is Doji Candlestick Pattern and Their Types
Consider the market conditions where the buying trend is strong, but some traders expect the current trend to reverse. So, they are selling. What's going to happen in this scenario? If every trader actively starts selling, the market will go down.
However, when it's not strong enough, the market can reflect indecisiveness. Traders keep an eye on those moments to predict when the market trends will change.
But here comes the question, how would you know when it is going to take place just by staring at the chart? Today, technical traders watch out for Doji candlestick patterns to pop up in the trading chart. So, you might be thinking, what is ‘Doji Candlestick Pattern’?
Before learning how to trade using the Doji Candlestick Pattern, it'd be nice to know the basics.
About Doji Candlestick Pattern
Doji Candlestick Pattern, also known by the name of Doji Star, is a part of the candlestick pattern. This is one of the unique patterns in the world of trade. This pattern is formed when the security opening price equals the closing price. This represents the indecisiveness or equality of bulls and bears. Doji candlesticks can be in the form of a cross, a plus sign, or an inverted cross.
The word "Doji" comes from the Japanese word meaning "mistake". The pattern gets its name because it shows that an asset's open and close prices are the same, and that's unlikely. As part of the trader's technical analysis, it is important to identify and understand trends in currency, futures, stock, or bonds.
The Doji Candlestick Pattern can often be seen below the trend, which is mainly seen as a sign of possible price reversal. Also, the Doji Candlestick Pattern appears primarily as a continuous pattern.
To identify and understand trends, traders should know the different candlestick pattern types and what they mean.
Doji Candlestick Pattern Types
Doji candlesticks have many forms, each with unique characteristics and interpretations. Let's discuss them in detail.
- Neutral Doji
A neutral Doji is usually formed when a stock's trading power is balanced in the market. This means when the price of a financial asset is closed at midday as high or low. A change in direction can be predicted according to the trend ahead of the Doji. Neutral Doji looks like a plus sign.
- Long-Legged Doji
A long-legged Doji appears to be like a cross. It reveals the financial asset's price that's being traded. It gets closed midway between the daily highs and lows. A long-legged Doji is formed when the trading power of a stock is balanced in the market. This type of Doji candlestick pattern shows great indecisiveness between sellers and buyers in the marketplace.
- Gravestone Doji
Gravestone Doji looks like an inverted 'T'. It signifies stocks or other financial assets that open and close at a day's lows. The pattern usually forms at the bottom or end of a downtrend. The upper and longer side of the Gravestone Doji, also called a shadow, signals at a possible end in the opposite direction to the market's current trend and reverses in direction.
- Dragonfly Doji
Unlike Gravestone Doji, Dragonfly Doji, which also looks like a 'T' implies that the financial assets or stocks or financial assets are opened and closed at the highs of the day. It forms at the peak of an uptrend and indicates a possible trend reversal. This type of Doji candlestick pattern shows a lot of hesitation between sellers and buyers in the marketplace.
What Doji Candlestick Patterns Tell Traders?
Almost every trading professional believes that all information is reflected in the security price. This statement only means that the price is valid. Past performance prices are not yet related to future prices and actual stock prices may not be related to intrinsic value. Therefore, technical analysts use the tool to filter out the noise and swiftly find the trades with the highest probability.
A candlestick chart is a tool developed by Homma Munehisa, a Japanese rice trader in the 18th century. Long later, in the 1990s, Steve Nison recognised the tool. Each candlestick pattern type has four sets of data to help determine its shape. Analysts typically make assumptions about price action based on this format. Each candlestick pattern is based on a high, low, and close price.
In general, the duration does not have a significant effect. Doji is considered to be both singular and plural, and mainly refers to the indecisiveness of both sellers and buyers. This may be a time when preferred buyers or sellers gain strength to continue the trend. Doji candlestick patterns are usually seen in the consolidation period.
Tech traders today use candlestick charts to reduce market noise and understand price movements. However, like other commodities, the candlestick chart itself does not show any change. Similarly, Doji has limitations.
The isolated Doji candlestick pattern is basically neutral and not a corroboration of a possible trend reversal. The pattern, location, and size of Doji formations can tell you more about changing sentiment. Some traders consider the Double Doji pattern to be a stronger signal of a trend reversal.
Also Read: What is Longwick Candlestick Pattern?
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Frequently Asked Questions
The different types of Doji Candlestick Patterns are Neutral Doji, Long-Legged Doji, Gravestone Doji, and Dragonfly Doji.
Also known as a bullish reversal pattern, the hammer candlestick happens when the bearish market suddenly starts moving in an opposite direction. It is when the price decline is over and the upward price movement is upcoming.
It's a strong bearish, and bullish candlestick pattern type. This is one of the unique Doji candlestick patterns as the stock has no intraday price movement, but it says a lot about what could happen to stocks in the near future.
This formation, which looks like a small horizontal line, signals the possibility of a super bearish or bullish trend at the start of the stock. This pattern does not appear from time to time, but when it does appear on the charts, traders should be prepared for large one-way movement in the counter.