Doji Candlestick Pattern: Types, Meaning & Trading Strategy

Doji Candlestick Pattern Explained

Doji Candlestick is a key pattern in technical analysis used by traders to identify potential reversals or indecision in the market. A Doji forms when the opening and closing prices of an asset are virtually equal, creating a small or non-existent body with upper and lower wicks (shadows).

Why is a Doji Important?

The Doji pattern reflects market indecision. Neither bulls nor bears gain control, and this equilibrium can signal a change in trend or continuation, depending on the context in the price chart.

Types of Doji Candlestick Patterns

There are several types of Doji patterns, each with its own market implication:

1. Common Doji

This type of Doji has small upper and lower shadows and a nearly invisible body. It represents complete indecision in the market and often appears in consolidation zones. Traders wait for confirmation before taking a position.

2. Long-Legged Doji

This Doji has long upper and lower wicks. It shows extreme indecision and a tug-of-war between buyers and sellers. It may signal a reversal, especially after a strong trend.

3. Dragonfly Doji

The Dragonfly Doji has a long lower wick, no upper wick, and the open/close at the top. It suggests a possible bullish reversal after a downtrend, showing that buyers pushed the price back up after sellers initially drove it down.

4. Four-Price Doji

This is a rare form where the open, close, high, and low prices are the same, appearing as a horizontal line. It indicates complete market standstill — no movement at all. Traders often ignore it unless seen with other patterns.

5. Gravestone Doji

This has a long upper wick, no lower wick, and the open/close at the bottom. It suggests a possible bearish reversal after an uptrend, showing sellers took control after buyers pushed prices up initially.

How to Trade Doji Patterns

• Context is Key: The significance of a Doji depends on its position within a trend.
• Look for Confirmation: Always wait for the next candlestick to confirm the direction.
• Combine with Other Indicators: Use support/resistance levels, RSI, or moving averages to strengthen the signal.

Example Chart

Refer to the image below that shows the five types of Doji patterns:

Doji Candlestick Pattern: Types, Meaning & Trading Strategy

Conclusion

Doji candlesticks are essential tools in a trader's toolkit. While they don't give direct buy or sell signals, they offer insight into market psychology. When used with other patterns or indicators, they can help predict reversals and plan effective trading strategies.