How to identify a Reversal in Charts with Doji Patterns
As you have noted by now, there are several types of charts you can use in the markets. These include bar charts, line charts, candlesticks, Heikin Ashi, renko, kagi, and area.
Nonetheless, candlesticks are the most important types of charts used in the market today.
These charts have been in use for centuries (they started being used in Japan in the 17th century).
Steve Nison, is one of the best-known writers on candlestick patterns. We recommend that you get his book, beyond candlesticks. This book will help you get to know more about candlesticks.
In this article, we will look at the Doji, which is an important type of patterns.
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What is a Doji candlestick pattern?
A Doji candlestick is one where the opening price of an asset is usually the same as the close. When this happens, it is usually the perfect Doji.
However, there is a flexibility on this rule. If the two prices are not the same within a few ticks, this can be said to be a Doji. There is no rule as to how to apply this flexibility. It solely depends on you as a trader.
The Doji is an essential pattern to identify reversals.
So, one of the most important uses of the Doji is to identify when there is a reversal. This can also be called as a bottom or a top. A top is a place where a rallying asset starts a new downward trend. A bottom is when a rallying asset starts moving upwards.
Dojis are good for reversals because they present indecision, uncertainty, or vacillation by buyers in an uptrend and sellers in a downtrend.
A good example of Dojis at the top is shown on the chart below. As you can see, the price starts to move lower after the Doji is made.
It can also happen to indicate a bottom. A good example of this is shown below.
Types of Doji Patterns
There are three main types of Doji candlestick patterns.
First, there is the long-legged doji. This is made up of a long upper and lower shadows. It has an approximately similar opening and closing prices. This Doji is usually a signal of indecision after a long upward or downward rally.
As such, they tend to be indicators of a consolidation phase.
The other type of Doji is the dragonfly doji. It is formed when the open, high, and close prices of an asset are similar. When there is a long lower shadow, it suggests that there was an aggressive selling phase. Buyers were able to withstand the selling and push the price up.
When there is an uptrend, the dragonfly Doji is usually a signal that more selling could be coming up. When there is a downtrend, it is a signal that there is an upward trend on the way.
Another type of Doji is the gravestone pattern. This is a bearish pattern that is formed when the open, low, and closing price of an assets are all close to one another with a long upper shadow.
When there is an uptrend, a gravestone Doji is usually a signal to exit or start a bearish pattern.
Doji patterns have been in use for centuries. As with other candlestick patterns, they started being used in Japan in the 17th century. They were used in rice trading. While these patterns are essential, you need to realize that they are never accurate.