Many traders consider Doji candles to be an important technical analysis tool when investing in forex. So What is a Doji candle? How do you trade effectively with this Japanese candlestick pattern? Join Forex Trading to learn details in the content below.
What is a Doji candle? Explore details about the Doji candlestick pattern
Understanding What is a Doji candle will help investors identify it on the price chart. From there, you can make comments about market trends as well as make appropriate trading choices. First, we will learn about the concept and detailed Doji candlestick patterns.
Concept of Doji candlestick
The Doji candlestick pattern is a Japanese candlestick pattern with a small candle body structure. In many cases, there is even no candle body, represented on the price chart as just a thin horizontal line. The closing and opening prices are almost equal, shown in the upper and lower candle shadows of equal length. Thus, the shape of the candle resembles a plus sign (+).
Because the opening and closing prices are approximately the same, Doji is an indecision candlestick pattern. It shows that the market is in balance, with buyers and sellers struggling with each other. During that trading session, the price may go up and down, but at the end of the session, the price is still pushed back to equilibrium.
In particular, Doji candles are often confused with hammer candle. Because both have thin candle bodies. However, Doji has both upper and lower shadows while Hammer usually only has lower shadows, the upper shadow is very short or almost absent.
Common characteristics of models What is a Doji candle?
Understanding the characteristics of the Doji pattern is very important. Only then can traders identify the appearance of candles on the chart. Characteristics of What is a Doji candle? This candlestick pattern will have the following basic characteristics:
- The small candle body is just like a very thin horizontal line.
- The upper candle shadow and lower candle shadow are almost equal in size.
- Candle color: Not important
There are 2 cases of Japanese Doji candles appearing:
- Doji candlestick pattern appears at the end of an upcycle or the end of a downcycle: A signal of weakness and the market will return to balance.
- Doji appears after many candles increase in size: A sign that buyers and sellers are strengthening. The market trend at this time may change from increasing to decreasing.
See more: Read candlestick charts: Basic & advanced material
Some outstanding advantages of Doji candlestick reversal
Doji reversal is a quite special case of this pattern. In theory, when the Doji appears, the market is in balance. However, based on the previous trend, this could be a signal that the market is about to reverse.
Therefore, the situation of hesitation and struggle will soon end. There will be one side that dominates and turns the market around. Based on this, traders can choose to enter orders to take profits or cut losses.
Typically, Doji reversal candles often appear at the end of an upcycle or the end of a downcycle.
Learn briefly about popular Doji candlestick patterns
At this point, the trader has grasped What is a Doji candle. You also need to know more variations of this interesting Japanese candlestick pattern. In addition to the standard pattern shaped like a plus sign (+), there are many other Doji patterns. Each model has different meanings and trading signals:
Long-legged Doji candlestick pattern
This pattern is also known as the Long Shadow Doji or the Pullman. The identifying characteristic is that the upper and lower shadows of the candle are both very long. When this pattern appears, the closing price and opening price of that trading session are equal.
The closing and opening prices will be between the upper and lower candle shadows. During the trading session, there are times when the price is pushed very high or pulled down very low. However, at the end of the session, the price still returned to equilibrium, shown by the upper and lower candle shadows being equal. There is a high possibility that the market will reverse soon because of the fierce struggle.
Dragonfly reversal Doji candlestick pattern
This situation is also known as Dragonfly Doji. The characteristic is that the candle body is very short or absent, located towards the top. The upper candle shadow is short, the lower candle shadow is very long. The shape of the entire candle is like a dragonfly spreading its wings.
The Dragonfly Doji pattern often appears in:
- Early uptrend
- End of downtrend
The meaning of the model is to show that the market is on an upward trend. At this time, purchasing volume increased suddenly. The selling side is dominant, causing the price to rise immediately. This is a very strong trading signal and traders should take advantage of it. The market trend can be a strong increase or a reversal from increase to decrease.
Dragonfly candles have a shape quite similar to a hammer candlestick. However, the hammer candle has a larger candle body, while the dragonfly candle has a very thin candle body. Traders should pay attention to avoid confusion leading to wrong decisions.
Doji Japanese candlestick pattern with 4 prices
This is also a very special variation of the standard Doji candle. This pattern is also known as the Shadowless Doji. It only has a thin candle body like a horizontal line.
In this case, what is the meaning of What is a Doji candle? Signals show that the market is very quiet. There are almost no large transactions taking place. Small waves also don’t move much. This is a situation where the market is sideways, with no side dominating. At the same time, traders should also consider trading because the signals are not clear.
How to effectively use What is a Doji candle?
When trading with Doji, traders should note that this model should not be used independently. Because it shows that the market is in a tug-of-war situation, it is difficult for traders to choose whether to buy or sell. By combining other technical analysis tools, you will easily locate price trends.
How to combine the RSI indicator with What is a Doji candle?
RSI is a great tool for you to combine with this Japanese candlestick model. Japanese candlesticks will help traders determine the time and location of entering orders. RSI has the effect of measuring the level of price change, so it will help traders determine trend reversals through trading volume.
Therefore, this combination will help erase signals that cause market noise. Order setting efficiency will increase. Transactions will therefore be safer and more efficient.
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Combine Doji candlestick pattern with resistance and support levels
Resistance and support levels will be tools for investors to grasp market psychology. At the same time, determine the supply and demand forces and know what threshold the price will reach. Therefore, when combined with the Japanese Doji candlestick, it will highlight the trading signal. Through support and resistance lines, traders will know the breakout and rebound levels of the price. From there, there is also a basis to set a reasonable stop loss.
Conclude
Thus, Forex Trading has provided detailed information to you about the content of What is a Doji Candle. It can be seen that, although it carries a reversal signal, this Japanese candlestick is not too reliable. The market is in a tense situation and depending on each case, the scenario will develop differently. Therefore, traders need to be careful when deciding to trade. It is safest to combine other indicators to give more authentic signals. To be able to use candlestick patterns more effectively, don’t forget to follow Forex Trading to receive more useful knowledge.
FAQs
What does the Doji candlestick mean?
This candlestick pattern shows that the market is in a state of tension, both buyers and sellers are pulling the price which may lead to one side dominating.
Why should you not trade with Doji 4 prices?
The 4-price Doji candlestick is a candlestick pattern with no shadow, only a very thin candle body. This shows that the market has no waves and no transactions. Therefore, it will not be effective to enter an order now.
Can Doji candles be used as an independent indicator?
Possible, but less effective. It is best to use a combination of indicators such as support, resistance, and RSI lines to increase accuracy.
