The doji is a commonly found pattern in a candlestick chart of financially traded assets (stocks, bonds, futures, etc.) in technical analysis. It is characterized by being small in length—meaning a small trading range—with an opening and closing price that are virtually equal.
The doji represents indecision in the market. A doji is not as significant if the market is not clearly trending, as non-trending markets are inherently indicative of indecision. If the doji forms in an uptrend or downtrend, this is normally seen as significant, as it is a signal that the buyers are losing conviction when formed in an uptrend and a signal that sellers are losing conviction if seen in a downtrend.
Types of Doji
Neutral: Dojis form when the opening and closing prices are virtually equal. Alone, dojis are neutral patterns.
Long-Legged: This doji reflects a great amount of indecision about the future direction of the underlying asset.
Gravestone: The long upper shadow suggests that the direction of the trend may be nearing a major turning point. It is formed when the opening and closing price of the underlying asset are equal and occur at the low of the day.
Dragonfly: The long lower shadow suggests that the direction of the trend may be nearing a major turning point. It is formed when the opening and closing price of the underlying asset are equal and occur at the high of the day.
A doji is a key trend reversal indicator. This is particularly true when there is a high trading volume following an extended move in either direction. When a market has been in an uptrend and trades to a higher high than the previous three trading days, fails to hold that high, and closes in the lower 10% of that day's trading range, there is a high probability of a downtrend in the ensuing days. Likewise, when the market has been in a downtrend and trades to a new low that's lower than the three previous trading days, fails to hold that low, and closes in the upper 10% of that day's trading range, there is a high probability of an uptrend in the ensuing days.
- Doji - stockcharts.com
- Neutral Doji - investopedia.com
- Long-Legged Doji - investopedia.com
- Gravestone Doji - investopedia.com
- Dragonfly Doji - investopedia.com
- Baiynd, Anne-Marie (2011). The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology. McGraw-Hill. p. 272. ISBN 9780071766494.
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