Lesson 2: Doji Candlestick in Forex
A Doji candlestick has the same opening and closing price. So, its real
body appears as a horizontal line. It represents indecision in the market.
Let’s take a look at what is going on when a Doji forms.
As the session started, the price was driven up by buyers - but it could also have
been sellers driving the price down. Then, sellers push the price back to its opening
price - and even lower, just to meet the buyer jumping in the market again and drive
the price up to its opening once more.
This process could have been repeated several times up to the end of the session
when the price closed the same as it opened. As you can see, there is no real
conviction about which direction the price should go and that’s what makes this
Candlestick neutral.
I wouldn’t advise anyone to make a trade based on only the appearance of Doji.
However, if we see a Doji after a strong bullish move and we are at the resistance
level, it could indicate that bulls have become exhausted and bears are ready to take
control.
Or the opposite, in a downtrend, after a strong selling pressure, a Doji appearance at
support could indicate that the bulls are getting ready to go along. The most
important thing to remember when trading candlestick signals is to look at the
context.
A Doji in the middle of a trading range means absolutely nothing and you should
never trade it. A Doji at support or resistance, however, is a completely different
story.
Now let’s get into the interesting part. A Doji has appeared at resistance. Remember,
Doji is a neutral signal, so don’t jump in the market straight away. Instead, let the
market come to you. Wait for a close below the Doji’s low and only then open your
short positions.
When placing your stops, you have to ask yourself one question. What is the price
that tells me I was wrong? In this case, a candle closing above the Doji’s high would
invalidate the reversal signal. So I would place my stop a couple of pips above the
Doji’s high.
A dragonfly Doji is formed when the session’s open and closing prices are at - or
near - the session high. It’s a bullish reversal signal. So we will only look for that in a
downtrend.
Bears were in charge at the start of this session. They pushed the price lower but
then bulls rejected this lower level and were able to drive the price up to its opening
where it also closed.
A gravestone Doji is the exact opposite of Dragonfly Doji. It’s a bearish reversal
pattern and we will only look for it in an uptrend.
The Bulls were in control. They pushed the price up but this new high was rejected
by bears, who managed to push the price back down to its opening price.
The long-legged Doji is a candle that has the same open and closing price but has
very long shadows on both sides. This candle signal shows complete indecision
between the bulls and bears and it’s not advisable to trade on its own.
I know I’ve already mentioned it, but this is very important. Candlestick signals are
valuable only when looked at in context. A Doji, in the middle of the range, is a
no-go. A Doji at support or resistance, however, is something to be looked at.