The Importance of a Doji Candlestick Pattern

Doji

Among all the candlestick patterns, the Doji is probably the most discussed pattern. No matter how much someone is in love with technical indicators or western price patterns, the Doji always catches everyone's attention. Even people who are absolutely new to technical analysis definitely knows something about Doji or have heard of it.

The questions to answer in relation to a Doji are - How is a Doji different from other important candlestick patterns, which also appear at the top & bottom to signal trend reversals? And why does the Doji get such special recognition? There are also many such other questions, which I will try to answer in a few of my future posts. Here lets get to know the Doji first.

Formation of the Doji Candlestick Pattern

When it comes to the formation and identification of candlestick patterns, the Doji is indeed one of the most crucial in the larger subject of candlesticks.

Its formation represents the equilibrium between the buyers and the sellers in the market. The opening price & the closing price are the same or have a very minimal difference hence forming a cross like shape. With the closing price finishing very near to the opening price, you will then see either a very small real body or no real body. That is when you have a candlestick Doji pattern.

Color Of the Doji Candle

When the opening price and the closing price of a candle are the same, we have a colorless Doji. But if they vary even within a couple of points we get either red or green colored Dojis. If the body of the colored Doji is very thin, then the color of the Doji candle does not matter & can be ignored.

Other than a trend reversal, what else does a Doji indicates?

When the open and close prices of a candlestick are at or near the same level, the Doji candlestick indicates indecisiveness on the part of investors/traders. Sometimes it also expresses an exhaustion in the current trend, therefore giving us a clear trend reversal signal. Hence it is very important to recognize a Doji candle and it's strength.

In conclusion, whether a trend reversal or not a Doji candlestick always carries some weight. When a Doji candle does not bring a significant trend reversal, it can still give us an important zone or an important price level, which the market won't be visiting in the near future. Sometimes such a Doji also results in a lengthy sideways market.

I'll discuss some of the different types of Doji like the long legged Doji, Dragonfly Doji etc in the upcoming posts.