A doji candlestick is a candlestick pattern that forms when the opening and closing prices are virtually equal, creating a candlestick with little to no body. Doji candles often signal market indecision and potential turning points in the trend. But are doji candles inherently bullish or bearish patterns? Let’s take a closer look.
What is a Doji Candlestick?
A doji candlestick forms when the opening and closing prices of a candle are almost equal. This creates a candlestick with virtually no real body, as the open and close are at the same level. The shadow-like appearance of doji candles resemble a cross or plus sign on the chart.
There are several types of doji candlesticks:
- Long-legged doji – This doji has very long upper and lower shadows, showing the session opened and closed in the middle of the trading range.
- Dragonfly doji – This doji has a long lower shadow and no upper shadow. The open, high, and close are all at the same high level.
- Gravestone doji – This doji has a long upper shadow and no lower shadow. The open, low, and close are all at the same low level.
In all cases, the small real body of the doji candlestick visually represents market indecision and consolidation. Long upper and lower shadows indicate the session traded in a wider price range but closed back near the open.
Doji Candles as Potential Reversal Signals
Due to their visual representation of indecision after a directional move, doji candles are often seen as potential reversal signals:
- In an uptrend, a doji candle may signal the uptrend is losing momentum and a potential reversal lower.
- In a downtrend, a doji candle may signal the downtrend is losing steam and a potential reversal higher.
This view of doji candles as reversal signals is largely based on their tendency to form after trends and represent consolidating, indecisive price action.
For example, after a strong uptrend, traders may take profits when a doji forms, sparking a potential drop. In a falling market, bottom pickers may enter long positions when a doji appears, stopping the selloff.
Doji Candles as Continuation Signals
However, doji candles do not necessarily act as clean reversal signals. They can also form within the larger trend as continuation patterns:
- In an uptrend, a doji candle may represent a brief pause before buyers regain control and push prices higher again.
- In a downtrend, a doji could signal brief indecision before sellers return and continue the selloff.
In these cases, doji candles act as consolidation patterns within the overriding trend. The existing bullish or bearish bias usually continues after the brief consolidation marked by the doji.
Other Factors to Consider
There are some other important considerations when interpreting potential doji reversal signals:
1. Context Within the Trend
Where the doji forms within the broader trend context is important. A doji in the early or middle stage of a trend is less significant than a doji forming after an extended move near potential support or resistance levels:
- Early doji candles have less relevance as reversal signals.
- Doji candles near obvious support and resistance levels have more significance.
2. Volume
Higher trading volumes on a doji candle add significance to its potential as a reversal predictor. High volume indicates increased conviction behind the signal.
3. Other Indicators
Using other technical indicators, like moving averages or oscillators, can help confirm whether a doji candle will act as a reversal or continuation signal within the larger trend.
4. Following Confirmation
It is important to wait for confirmation on the next candles before acting on a doji reversal signal. One doji candle is often not enough for a trend change. Confirmation may come as a large bullish or bearish candle backing up the doji signal.
Doji Candles in Different Markets
Doji candles can form reversals or continuations in any market, but are especially prominent in certain assets:
Forex
Doji candles are common reversal signals in forex currency pairs like EUR/USD or GBP/USD. This is due to currencies often trending and consolidating between technical levels.
Commodities
Doji candles often appear near swing highs or lows in commodity markets like gold, oil, or natural gas after extended trends.
Stocks
Doji candles may form reversals on stock charts, especially on heavy volume. However, individual stocks can also grind out doji continuations as they consolidate.
Cryptocurrencies
Crypto assets like Bitcoin are prone to volatility and sharp trend changes. Doji candles often form reversals after violent rallies or sell-offs.
Doji Candlesticks in Summary
Overall, doji candles themselves are neutral patterns reflecting indecision in the market. However, they often form potent reversal signals at key points in the trend:
- A doji candle does not automatically mean a reversal is imminent.
- Context is key – doji candles near support and resistance in the trend have more significance.
- Volume, other indicators, and confirmation add relevance to doji reversal signals.
- Doji candles can also mark consolidations and brief pauses within larger trends.
Due to their representation of indecision after directional moves, doji candlesticks have significant predictive value for potentially calling trend reversals. However, they should be considered in the larger technical context of the trend and confirmed with additional signals before acting.
Examples of Doji Candles Signaling Reversals
Here are some examples of doji candles forming significant trend reversals on the charts:
EUR/USD Daily Chart
This EUR/USD daily chart shows a long-legged doji candlestick forming after an extended downtrend. This doji marked the end of the selloff as bulls stepped in:
| Date | Open | High | Low | Close |
|---|---|---|---|---|
| 10/5/2022 | 0.9801 | 0.9899 | 0.9752 | 0.9898 |
This long-legged doji after a downtrend shows the session opened and closed in the middle of the day’s range. It reflected building bullish momentum.
Gold Weekly Chart
This weekly gold chart displays a gravestone doji reversal candle after a decline. The long upper shadow shows buyers rejecting lower prices:
| Date | Open | High | Low | Close |
|---|---|---|---|---|
| 6/5/2021 | 1862 | 1862 | 1722 | 1722 |
This gravestone doji reversal signaled the selloff was over and marked a bottom before renewed upside. The close near the lows showed sellers were spent.
Nasdaq Index Daily
On this Nasdaq daily chart, a dragonfly doji candle reversed the uptrend after an overextended rally. The lack of a lower shadow reflected an absence of sellers:
| Date | Open | High | Low | Close |
|---|---|---|---|---|
| 2/19/2021 | 13860 | 13860 | 13625 | 13860 |
This high-flying dragonfly doji signaled topping behavior as buyers could not sustain upward momentum.
Doji Continuation Examples
Here are some examples where doji candles formed within trends as brief consolidations:
Bitcoin Daily
This Bitcoin daily chart shows a doji candle consolidating within a strong uptrend. The indecisive pause was followed by continuation higher:
| Date | Open | High | Low | Close |
|---|---|---|---|---|
| 12/17/2020 | 22800 | 23100 | 22205 | 22915 |
This doji candle marked a brief consolidation before bullish momentum returned in force.
S&P 500 Index Hourly
This S&P 500 hourly chart displays a doji candle within a short-term downtrend. The signal did not reverse the selloff as bears maintained control:
| Time | Open | High | Low | Close |
|---|---|---|---|---|
| 11am | 3685 | 3695 | 3672 | 3685 |
This doji shows indecision during the selloff, but sellers soon regained dominance as the downtrend continued.
GBP/JPY Daily
This GBP/JPY daily chart displays a doji candle consolidating after a decline. However, bears maintained control as the downtrend resumed:
| Date | Open | High | Low | Close |
|---|---|---|---|---|
| 8/10/2022 | 162.42 | 163.19 | 161.33 | 162.39 |
This doji candle marked a pause in selling pressure before lower prices continued. It acted as a continuation signal, not reversal.
Conclusion
In summary, doji candlesticks themselves are neutral patterns reflecting consolidation and indecision in the markets. However, due to their tendency to form after directional moves near support and resistance, doji candles often act as potent reversal signals once confirmed.
Not all doji candles mark trend reversals though. They can also form within ongoing trends as brief pauses or continuations. Context is key in determining if a doji will act as a reversal or continuation.
With their representation of indecision, doji candles have significant predictive power at potential turning points in trends. But traders should incorporate other factors like volume, indicators, and confirmation before basing decisions on doji signals.