In the world of technical analysis, the Doji candlestick pattern is one of the most well-known signals indicating a potential market reversal. This pattern, typical of Japanese candlestick charts, can foretell a change in trend if it appears at the right time and in the right context. In this article, we will look at what a Doji is, how to recognize it, and how to correctly interpret and use it in your trading strategy.

What is a Doji candlestick pattern?

The Doji pattern is a candlestick configuration in which the opening and closing prices are nearly the same. The resulting candlestick appears as a thin horizontal line (or small rectangle) with long shadows above and/or below. The Doji indicates indecision in the market: buyers and sellers are fighting for control, but neither side has a clear advantage.

The appearance of a doji often signals the end of the current trend, whether up or down, and can warn of a possible reversal or at least a correction. However, to confidently interpret the signal, it is important to consider the context, as well as other indicators and patterns.

Types of Doji and their meanings

There are several types of doji, each of which has its own characteristics and can predict different scenarios:

  1. Standard Doji: This candle has a minimal body and symmetrical shadows at the top and bottom. It usually symbolizes market uncertainty and indicates a potential reversal.

  2. Long-legged Doji: This type is characterized by long shadows on both the top and bottom. It shows that the price fluctuated during the period but ended it at the opening level. The appearance of this Doji after a long trend (up or down) can indicate a weakening of the current trend.

  3. Gravestone Doji: The candle body is almost absent, and the shadow is only on top. This pattern appears when the price initially rises strongly, but then returns to the opening level. Usually indicates weakness of buyers and the possibility of a downward reversal after an uptrend.

  4. "Dragonfly" Doji: On the contrary, this candle has a long shadow below and no upper shadow. This is a signal that the market has returned to the opening level after a decline. This Doji may indicate a possible upward reversal.

How to Use Doji in Trading: Basic Strategies

To use the Doji pattern effectively, it is important to evaluate it in the context of the current trend and other indicators. Doji alone is not always a sufficient signal to open a position, so it is better to use it together with other technical tools.

1. Confirming a trend or reversal using volumes

When a doji appears after a long trend, it makes sense to study the trading volumes. Increased volumes when a doji appears often reinforce its significance, as they indicate that the market is overestimating the current trend. If, after a doji, volumes begin to increase in the direction of the opposite trend, this may be a sign that a reversal has already begun.

2. Combination with support and resistance levels

When a doji appears near key support or resistance levels, its significance as a signal increases. For example, if the market is in an uptrend and reaches a strong resistance level where a gravestone doji forms, this may be a signal to sell. You can also wait for the next candle after the doji to see which way the price will go to increase accuracy.

3. Using RSI and MACD indicators

To assess the strength of the Doji signal, it is useful to use indicators such as the relative strength index (RSI) and the moving average convergence divergence (MACD). For example, if the Doji appears in combination with an overbought signal on the RSI, this may indicate an imminent reversal to the downside. At the same time, when the MACD crosses in the direction of the current trend, it is worth being careful about opening a new position.

4. Trading Based on Candlestick Patterns with Doji

Doji is often used as part of other candlestick patterns, such as the evening star or morning star. For example, when an evening star (a pattern that includes a bullish candle, a doji, and a bearish candle) forms, the reversal signal is strengthened, especially after an uptrend. Such combinations help traders get more accurate signals for entering or exiting a position.

Examples of using Doji in practice

  1. Doji at the peak of growth: Let's imagine a situation when Bitcoin, after a sharp rise, stops at the resistance level, and a "grave" doji appears on the chart. This can be a signal for experienced traders that the upward momentum has weakened, and a correction or even a downward reversal should be expected.

  2. Doji in the correction phase: In a down market, after a series of falls, the price may form a "dragonfly" at the support level. In this case, if the next candle closes higher, this may be a confirmation that the correction is over and growth will begin soon.

Mistakes to Avoid When Trading the Doji Pattern

  1. Ignoring Market Context: A Doji that appears in the middle of a sideways trend does not carry the same power as a Doji that appears at the top or bottom of a trend. It is important to keep in mind that a Doji may not be an effective signal in a sideways trend.

  2. Underestimating the importance of volume: The lack of confirmation by volume can reduce the accuracy of the signal. If the volumes are low when the doji is forming, it may indicate random price fluctuations rather than real potential for a reversal.

  3. Dependence on a single signal: Doji alone is rarely enough to open positions, especially in uncertain market conditions. It is recommended to confirm it with other tools, such as Fibonacci levels or a moving average indicator.