In Japanese, “Doji” means error, in the world of day trading it translates to indecision in the stock market. A Doji candlestick pattern forms when a stock market’s open price and close price are almost exactly the same. This tells traders that buyers and sellers are not gaining anything; essentially at a standstill. A Doji indicator is mostly used in patterns, and it is actually a neutral pattern itself. Candlestick traders rely on this data to initiate trades and make a plan. A Doji candle is different from the positive green colored candle and the negative red colored candlesticks; because it does not have a rectangular body.
A Doji is used to show stock market indecisiveness and aids as an indicator that there will be a reversal in the market. The directions of the stock market would be either upward or downward. It is important to identify and know the different types of Doji so when day trading you know if it is time to enter, exit or wait. Watching the different patterns with the doji will aid you in the stock market.
The thick body of the candlestick shows the opening and closing of prices. If the close is higher than the open; then the candle is colored white or green. If the open is below the close; then the candle is colored red or black. The thin lines above and below the candle’s body represent the high and low prices caught throughout the candle’s life span also referred to as a wick.
The four key types of Doji candlesticks that will aid you will take the form of a plus sign, a cross, a “T” and an inverted “T”. These unique forms will help you distinguish them once you see them on the chart. Each of these unique candlestick patterns will help identify possible primary trend reversal during a time where there are high trading volumes in a distinct direction.
4 Types of Doji Candlestick Patterns
The Plus Sign
The plus Sign Doji candlestick pattern is formed when the buying and selling powers in the stock market are equal. When this occurs in an uptrend or downtrend it indicates that the market is most likely going to reverse the direction it is currently in. So, as you see in the example below before the plus Sign Doji appeared the market was trending upwards. After the plus Sign Doji appeared the stock market then went downwards. Given the pattern example below if a call was placed a loss would have happened. If you would have placed a put you would have made a profit.
The Cross Doji candlestick pattern is an indication there is indecision amongst the future direction the stock market will move. In the example below once the Cross Doji appeared the market then had a trend reversal. Meaning the stock market was going upward initially then after the Cross Doji appeared the market went downward. If you would have placed a put then you would have made a profit. If you would have placed a call you would have lost money since the Cross Doji pattern clearly indicated that the stock market went down not in an upward direction.
The “T” Doji candlestick pattern is an indicator that a stock opened and closed at the high of the day. It tends to form at the peak of an upward trend and signals a possible trend reversal. This long wick also shows a great deal of indecision in the stock market amongst buyers and sellers. In the example below it shows clearly the market was trending upwards. Once the “T” Doji appeared the market then went in a downwards direction. With the “T” Doji pattern example below a put would have been profitable and a call would have been a loss.
The Inverted “T”
The Inverted “T” candlestick pattern is an indicator that a stock opened and closed at the day’s low. The pattern normally forms at the end of a downward trend. The long wick on the upper side indicated the possibility to the current direction the stock market is trending and that there will be a reverse in direction. As in the example below the stock market was trending upward and then once the inverted “T” pattern appeared it then went downward.
Summary of the Top 4 Doji Candlestick Pattern
In conclusion, the four Doji candlestick patterns; the plus Sign Doji, the Cross Doji, The “T” Doji, and the Inverted “T” are great indicators. Spotting them and interpreting their signals will be very beneficial to your trading. Doji candlestick patterns help identify moments of tug-of-war in the stock market. Also, like a regular candle shines light and points out the potential opportunities to place a trade in the stock market.
Doji patterns do not happen frequently and are great indicators but alone doesn’t help you make an informed decision. Remember to keep an eye on the wick and it will help you to keep watch on which way the market is trending. Also pay attention to the other candlesticks around the doji. You’ve learned patterns like doji candles have a short life span. They are only effective for predicting short-term price shifting rather than illuminating longer-term changes. Doji size matters but this is only related to how on average unpredictable the stock market is at the time.
Which pretty much translates to continuously analyzing the candles as they form on the chart. Think of it like this if you were sitting in complete darkness just lighting one candle won’t light up the whole place. But you strategically place candles all over the house and you now have a well-lit area.
So why when you combine your Doji patterns; think of that as one lit candle where you sat in darkness. Studying would be another lit candle to then another candle being lit by following and practicing a tested and proven process. All of these candles together will shine the light you need to execute, make successful trades and be profitable.
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