What are Doji Candlesticks?
They are candlestick pattern with out a real body. It is a simple candlestick pattern made of a single candleline. They represent the areas of uncertainty.
They can occur any where on the chart. They may be at the end of an up trend or at the end of a down trend or they may appear here and there with in the trend.
It may be a part of a complex candlestick pattern.
The stock opens and moves in one direction to some extension. The perception of the market changes. So the prices moves in the opposite direction. At the other end the perception changes again and the price retraces its path. At the end of the session the price moves towards the opening price and closes at it.
This results in the absence of the real body with only upper and lower shadows.
On the day of increased volatility the price makes a larger swing up and a larger swing down. But at the end of the session the price moves back and closes where the market opened in the beginning.
This results in the formation of long upper and lower shadows but with out a real body. Only wicks are present above and below a small horizontal line.
The real body which is the expression of the trend in the given time period, is totally absent. On a Doji day or a time period the price does not make a trending movement. Even if it does make a trending movement in the beginning, by the end of the session it comes back towards open price and closes at it. So no trend was exhibited in that time period.
The lack of body is the result of indecision among the traders, which ultimately proved to be neutral. In the tug of war between bulls and bears, no body won. Buyer's buying power has neutralized the seller's selling power and seller's selling power has neutralized the buyer's buying power.
So the market is totally indecisive. The traders are in confusion. Both supply and demand are balanced. The market is neutral and it has to decide the next movement.
This can happen near the support and resistance. This can happen when there is profit booking after a trending movement. This can happen at the overbought and oversold areas when the buyers and sellers get exhausted.
These candlesticks just mean indecision. When you reach a Doji you also slow down. Wait and watch to see what happens next. The price may most likely continue its trend or it might reverse.
If there is one doji candle it means indecision. If there are many of them it means greater indecision. Trader should become alert full to take the next action.
If you are in a long position and if you meet with a doji at a resistance level squeeze your stop loss to just below that candlestick. Similarly if you are in a short trade and if you come across a doji at the support level place a stop loss buy order just above that candleline. If the market continues you will continue to have trade in the trend or if the market reverses you will have your trade exited with maximum possible profit.
But if you want to enter a trade wait for the next day's confirmation candlestick. If you get doji at a support and if next day is an up day or a white candlestick, buy above the white candle and place a stop loss order below the swing low.
Similarly if come across a doji at the resistance level and next confirmation candle is a black candlestick short sell below the black candle. Place a protective stop loss buy order just above the swing top.
If the open and close for the session is almost near to each other, then it can be considered as a Doji. They work better to mark a top of an up trend than to mark bottom of a down trend.
High Wave Doji Candlesticks will have unusually long shadows with out a real body. Although the bulls and bears push the price to a greater extent, ultimately the price comes back and closes at the opening.
In a candlestick charting Dojis are more important when they are part of other formations. They are turning points in Morning Doji Star and Evening Doji Star formation. When they are contained with in the previous candle's real body, they are part of Harami.
The market can open and close at the low of the day. The resultant formation is a Gravestone Doji. If the open and close are at the high of the day we get a Dragon Fly Doji.
Click the link below to read and learn about them.
There are many more simple candlestick patterns used in stock analysis. Some of them are listed below. You may click on the name of each pattern listed below to learn and understand more about them.