How to trade using the doji candlestick pattern? | FBS (2024)

Doji candles are rare birds, but if you catch them, it can be a great chance to seize the right entry moment. This article will discuss what a Doji candle is. You will also get a Doji strategy that can bring profit.

What is a Doji candlestick?

The Doji candlestick, or Doji star, is characterized by its "cross" shape. This happens when a Forex pair or any other trading instrument opens and closes at the same level, leaving a small or non-existent body while showing the same length upper and lower wicks.

A Doji candlestick pattern occurs when the market’s open and close prices are nearly the same. This may happen when the market opens and bull traders push prices up, while bear traders reject the higher price and pull it down. It could also be that bearish traders are trying to get prices as low as possible, while bulls are resisting and pushing the price up. The up and down movements, that occur between opening and closing, form the wicks. As a result, the body is flat or, as they say, the candlestick has no body.

Typically, a Doji represents indecision in the market, but it can also be a sign of slowing momentum in an existing trend.

Types of Doji Candlestick pattern

How to trade using the doji candlestick pattern? | FBS (1)

Common Doji, or Doji star

This is the most common type of Doji candlestick pattern. When buying and selling are almost the same, this pattern occurs. The future direction of the trend is uncertain as indicated by this Doji pattern. The common Doji is a standalone candlestick that doesn't mean much on its own. To understand what this candlestick means, traders watch the previous price action.

Long-legged Doji

The long-legged Doji has longer vertical lines above and below the horizontal line. This indicates that during the period of the candle, the price moved sharply up and down, but closed at almost the same level as it opened. It shows indecision between buyers and sellers and is more dramatic than the common doji.

Gravestone Doji

The Gravestone Doji is the opposite of the Dragonfly Doji. It appears when price action opens and closes at the bottom of a trading range. After the candle opening, buyers were able to push the price higher, but by the close, they were unable to maintain the bullish momentum. At the top of an up move, this is a bearish signal.

Dragonfly Doji

A dragonfly Doji can appear either at the top of an uptrend or the bottom of a downtrend and signals the possibility of a change in direction. There’s no line above the horizontal bar, which creates a "T" shape and indicates that prices haven’t risen above the opening price. A strongly extended lower wick of this Doji at the bottom of a bearish move is a very bullish signal.

Advantages of using the Doji candlestick in technical analysis

The Doji star can prove invaluable as it gives Forex traders a "pause and reflection” moment. If the market moves higher when a Doji pattern appears, this can be a sign that the buying momentum slows down or the selling momentum is starting to pick up. Traders may see this as a sign to get out of an existing long trade.

However, it’s important to consider this candle formation together with a technical indicator or your specific exit strategy. Traders should only exit such trades if they’re confident that the indicator or exit strategy confirms what Doji is suggesting.

Remember, it’s possible that the market was hesitant for a short period of time and then continued moving in the direction of the trend. Therefore, it’s extremely important to conduct a thorough analysis before closing a position.

How to trade the Doji candlestick

One Doji is usually a good sign of indecision, however, two Dojis in a row represent an even bigger sign that often results in a strong breakout. The Double Doji strategy seems to use a strong directional move that is reversed after a period of indecision. Traders can wait until the market goes up or down immediately after the Double Doji.

On the BTCUSD chart below, the entry could be below the two Doji lows and the Stop Loss above the two Doji highs. Targets can be at the recent support level.

How to trade using the doji candlestick pattern? | FBS (2)

Conclusion

Candlestick patterns like Dojis can be very informative if traders want to understand the market better. However, Doji candles work best when used together with other technical tools and the trend.

In general, the more complex and sophisticated your Doji trading strategy is, the more likely you are to make informed trading decisions. Just make sure you test what you're doing if you don't want to end up in a situation where your account balance is damaged.

every trader should know

How to trade using the doji candlestick pattern? | FBS (3)

Author: FBS Analyst Team

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How to trade using the doji candlestick pattern? | FBS (2024)

FAQs

How to trade the Doji candlestick pattern? ›

Doji trading strategy

For a bearish candlestick, a trader could place a short sell order below the doji low, then place a stop-loss above the doji high. If the price does drop, the entry is triggered and the risk is controlled if the price moves back to the upside. For an exit, a trailing stop-loss​​ could be used.

What is the 3 candle rule in trading? ›

It consists of three successive candlesticks – the first is long and bearish and is followed by a smaller bullish bar that is completely engulfed by the first one. The third candle is bullish and closes above the second candle's high, suggesting a potential shift from a downtrend to an uptrend.

How to read doji candles? ›

The vertical line of the doji pattern is called the wick, while the horizontal line is the body. The wick can vary in length, as the top represents the highest price, and the bottom represents the low. The body represents the difference between the opening and closing price.

What is the success rate of doji candles? ›

Table: Doji Candle Performance Data
Test ResultsDoji Candle
Max Drawdown-47.5%
Max Drawdown (Asset)-59.2%
Average Win3.7%
Average Loss-3.5%
8 more rows
May 4, 2024

What is the doji confirmation strategy? ›

Traders can use Doji candlesticks to confirm a breakout, which can help them make more informed trading decisions. 3. Doji Confirmation: To confirm a Doji breakout, traders can look for additional signals, such as an increase in trading volume or the formation of a bullish or bearish candlestick pattern.

What is the best candlestick pattern to trade? ›

Top 7 Candlestick Patterns
  • The Hammer Candlestick Pattern. One of the most popular candlestick patterns is the Hammer. ...
  • Bullish and Bearish Engulfing. The Engulfing pattern is another popular formation traders follow. ...
  • Shooting Star. ...
  • The Doji. ...
  • Inside Bar. ...
  • Key Reversal. ...
  • Morning/Evening Star.

What is the 8 10 candle rule? ›

The 8-10 Rule: Place one 8 ounce candle for every 10 feet radius of room.

What is the secret of candlestick pattern? ›

The body of a candlestick represents the opening and closing prices of the stocks during the trading period, the wicks represent the highest and the lowest price points, and the colour represents the direction of price movements.

What is the King candle trading strategy? ›

The trader must identify a king candle in the price chart and wait until the breakout occurs in one direction or another. When the breakout is confirmed, the trader can open a position in the direction of the breakout.

What is a perfect doji? ›

The perfect Doji has the same open price and close price, however, something must be considered. If the difference between the open and close prices is within a few ticks, this could also be interpreted as a Doji pattern.

What is the psychology of the Doji candlestick pattern? ›

The Doji pattern represents market indecision, as neither buyers nor sellers can dominate the market, resulting in a close price that's nearly equal to the open price. The psychological significance of the Doji pattern lies in its ability to signal a balance of power between buyers and sellers.

What is the doji candle rule? ›

The long-legged doji is a type of candlestick pattern that signals to traders a point of indecision about the future direction of a security's price. This doji has long upper and lower shadows and roughly the same opening and closing prices.

What is the doji star strategy? ›

ENTRY: When the price of the stock starts trading above the close price of the third candle of the Morning Doji Star candlestick pattern, traders can take a long position. TARGET: Traders can exit the long position when the price of the stock reaches near the immediate resistance zone.

Is the doji reliable? ›

A Doji does not occur frequently and is therefore not reliable or a trustworthy indicator on its own. It must be used with other chart pattern analysis techniques in order for a trader to make an informed decision. It does not always symbolize an extended trend reversal.

Is a doji candle bullish or bearish? ›

The doji candle is a neutral pattern; it can be either bullish or bearish. The character depends on the doji type and the place where it emerges. However, a doji provides a stronger signal when it appears in an uptrend; in this case, it is a sign of a bearish reversal.

What to do if doji candlestick? ›

Summary
  1. For a bullish Doji, an option could be to place a buy order above the Doji high, then place a stop-loss below the low of the Doji. ...
  2. For a bearish candlestick, a trader could place a short sell order below the Doji low, then place a stop-loss above the Doji high. ...
  3. For an exit, a trailing stop-loss could be used.

How do you trade rejection candles? ›

For a bullish rejection candle, you might consider entering a 'buy' trade after the candle closes, with a stop loss below the low of the candle. For a bearish rejection candle, you might consider entering a 'sell' trade with a stop loss above the high of the candle.

How to trade gravestone doji? ›

Stobotics
  1. Identify a Gravestone Doji pattern at the top of an uptrend.
  2. Wait for the next candle to close below the Gravestone Doji candle's level and consider entering a short-selling position.
  3. Enter a long position if prices move above the Gravestone Doji's candle level.
Feb 10, 2024

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