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Doji

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Main article: Candlestick pattern

The doji is a commonly found pattern in a candlestick chart of financially traded assets (stocks, bonds, futures, etc.) in technical analysis. It is characterized by being small in length—meaning a small trading range—with an opening and closing price that are virtually equal.[1]

The doji represents indecision in the market. A doji is not as significant if the market is not clearly trending, as non-trending markets are inherently indicative of indecision. If the doji forms in an uptrend or downtrend, this is normally seen as significant, as it is a signal that the buyers are losing conviction when formed in an uptrend and a signal that sellers are losing conviction if seen in a downtrend.

Types of Doji

  • Neutral:[2] Dojis form when the opening and closing prices are virtually equal. Alone, dojis are neutral patterns.
    Neutral:[2] Dojis form when the opening and closing prices are virtually equal. Alone, dojis are neutral patterns.
  • Long-Legged:[3] This doji reflects a great amount of indecision about the future direction of the underlying asset.
    Long-Legged:[3] This doji reflects a great amount of indecision about the future direction of the underlying asset.
  • Gravestone:[4] The long upper shadow suggests that the direction of the trend may be nearing a major turning point. It is formed when the opening and closing price of the underlying asset are equal and occur at the low of the day.
    Gravestone:[4] The long upper shadow suggests that the direction of the trend may be nearing a major turning point. It is formed when the opening and closing price of the underlying asset are equal and occur at the low of the day.
  • Dragonfly:[5] The long lower shadow suggests that the direction of the trend may be nearing a major turning point. It is formed when the opening and closing price of the underlying asset are equal and occur at the high of the day.
    Dragonfly:[5] The long lower shadow suggests that the direction of the trend may be nearing a major turning point. It is formed when the opening and closing price of the underlying asset are equal and occur at the high of the day.

A doji is a key trend reversal indicator. This is particularly true when there is a high trading volume following an extended move in either direction.[6] When a market has been in an uptrend and trades to a higher high than the previous three trading days, fails to hold that high, and closes in the lower 10% of that day's trading range, there is a high probability of a downtrend in the ensuing days. Likewise, when the market has been in a downtrend and trades to a new low that's lower than the three previous trading days, fails to hold that low, and closes in the upper 10% of that day's trading range, there is a high probability of an uptrend in the ensuing days.

See also

References

  1. ^ Doji - stockcharts.com
  2. ^ Neutral Doji - investopedia.com
  3. ^ Long-Legged Doji - investopedia.com
  4. ^ Gravestone Doji - investopedia.com
  5. ^ Dragonfly Doji - investopedia.com
  6. ^ Baiynd, Anne-Marie (2011). The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology. McGraw-Hill. p. 272. ISBN 9780071766494. Retrieved 2013-04-30.
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