Doji Candlestick Pattern: How to use it to identify Reversals

As you have noted by now, there are several types of charts you can use in the markets. These include:

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).

There are several types of candlestick patterns that traders use. Some of these patterns are the evening star, morning star, doji, hammer, engulfing, and piercing lines among others.

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.

Doji Candle analysis

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.

In the chart below you can see a good example of Dojis at the top. As you can see, the price starts to move lower after the Doji is made.

doji top pattern

Doji at the Top

It can also happen to indicate a bottom. You can find a good example of this below.

doji bottom

Doji at the bottom

Types of Doji Candlestick Pattern

There are four main types of Doji candle patterns. Below we deal with the three most particular cases, avoiding the basic one (similar to a plus). Just know these for a good understanding of the tool.

Long-Legged Doji

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.

Dragonfly Doji Candlestick Pattern

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.

Gravestone

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.

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Final Thoughts

Doji candlestick pattern have been in use for centuries. As with other candlestick patterns, this started being used in Japan in the 17th century (in rice trading for the most). While these patterns are essential, you need to realize that they are never accurate.

As such, it is usually important to use them in combination with other technical indicators like moving averages and RSI.

External Useful Resources

  • Learn When A Doji Is Formed In Candlestick Patterns – Commodity.com
  • Understanding The Doji Candlestick Pattern In Technical Analysis – Market Realist

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