The Doji Pattern

Candle stick charting can allow an investor to observe different patterns which describe current market conditions; and can guide investors to the potential future direction of a security.

When opening prices and closing prices are equal to one another, the bar is called a Doji. A Doji can have many definitions and the length of the tails (the high and the lows relative to the open and the close) described the Doji.

By themselves Doji’s are considered neutral patterns but when added to other patterns, they take on meaning.

When a Doji is accompanied by long wicks it shows that market participants are experiencing indecision.

Long wicks reflect that the prices during the course of a trading session traded away from both the opening and closing price, before returning to equilibrium.

The bulls had control for part of the day, pushing prices higher, but their reign was short lived as the bears took control moving the market lower.

Eventually prices returned to their opening values, reflecting indecision by both bulls and bears.

The relevance of a Doji depends on the preceding prior price bars, trends or consolidation.

doji

For example, after the Nasdaq 100 gapped down, a Doji was created showing that market particpants were neutral and prices moved back toward their equilibrim levels.

The Doji can be seen in the chart (from Alpari.com) above circled in green.

After a strong market climb a Doji would symbolize that purchasing pressure is beginning to weaken.

The Doji would also reflect indecision after a large decline.

A Doji after a red bar would symbolize that selling pressure is beginning to wane.

The Doji indicates that the forces of supply and demand are in equilibrium.

One of the most prominent Doji formations is the Dragon fly Doji.

This type of Doji is created when the open, high and close are equal and the low creates a long tail which is referred to as the shadow.

The resulting candlestick looks forms a “t” shape as prices were rejected from lower levels after spending most of the trading session below the open.

Candlestick pattern Doji

The “dragon fly Doji” shows that by the end of the session, buyers took control of price action and pushed prices back to the opening level which closed at the session high.

This is a sign of a reversal, but before a trader places a bullish bet they will need confirmation.

The Doji is one of the most interesting of the candle stick patterns, and also one of the easiest to recognize.

The Doji shows market indecision, were supply and demand for prices are equal.

Doji patterns are used in conjunction with other price action and candlesticks to determine their value to an investor.

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