20 Jan 2020
The 5 Different Types of Doji Candlestick Patterns
Price charts are powerful tools for forex traders. Thanks to advancements in trading technologies, traders have various ways to study these charts to understand price action and locate patterns. Platforms like MT4 allow traders to open multiple charts at once. Candlesticks are popular ways to study such charts. They provide a range of information about price movements, with their shapes leading to opinions regarding trends, entry/exit decisions and stop-loss points. A specific type of candlestick is the Doji candlestick, which shows market indecision. It is often considered to be an indicator of a potential change in market direction. These candlesticks are easy to locate, and their wicks can guide traders as to where stop-losses can be placed. Let’s understand more about them through their 5 variations.
What is a Doji Candlestick? How is it Traded?Before moving on to their types, let’s understand how to identify them. A Doji candlestick appears like a cross or plus sign. These are neutral patterns, where the wicks show that open and close prices for a timeframe period were practically the same. Their appearance could mean a potential reversal in trends in the near future. “Doji” in Japanese means mistake, referring to how rare such patterns can be. The prices may have moved between the open and close levels of the candle, but the market was indecisive about where to take the currency pair (up or down). This led to no dominant directional force on the price. While such situations and the Doji are rare, when they do appear, they are either on the top of a retracement in the downtrend or below a retracement in an uptrend. At such times, traders can consider trading the Doji in the direction of the trend. The stop-loss can be placed below the lower wick in an uptrend or above the upper wick in a downtrend. The figure below shows a standard Doji. Depending on where the open and close prices are, the Doji can have some variations.
1. Standard Doji Pattern/Doji StarThe standard Doji candlestick does not mean anything on its own, so traders place them in the context of an ongoing price trend. This pattern forms when buying and selling activities are in equilibrium, but the prior trend needs to be considered too. If the candlestick forms within an uptrend, it could indicate a likely change in market direction. A strong bullish candlestick formation prior to the Doji is considered to indicate a significant uptrend. If a bearish candlestick is formed below the Doji’s low (and it has a lower high than the Doji’s high), then traders consider it to be a sell signal. The opposite is applicable for a buy scenario. A strong downtrend can be followed by a Doji formation, to be followed by a bullish candlestick above the Doji high.
2. Long-Legged Doji PatternThis pattern is marked by longer wicks than the standard Doji candlestick. This means that at some point during the pattern formation, both buyers and sellers tried to dominate, but there was no real winner when the candle closed. Traders here focus on the closing price, in relation to the mid-point (50% of the candlestick length).
- If the closing price is below the mid-point, it can resemble a bearish pin-bar. It becomes important if it appears at the resistance levels.
- If the closing price is above the mid-point, it can resemble a bullish pin-bar. If this forms at the support levels, it could be a valid indicator of an uptrend.