In forex trading, a doji candlestick is formed when the open and close prices for a specified time period are the same or within a few pips of each other, forming a small or non-existent body. The wicks can be long or short, above or below or both, but it is the small body that defines a doji.
In itself, a doji is neutral, signalling only market indecision and a stand-off between the bears and bulls, and depending upon context to give that indecision meaning. In a consolidating market, which is indecisive by nature, a doji means little; but when it forms in a trending market, technical analysts watch for either a trend reversal or a continuation.
Much of a doji’s information is contained within its wicks or shadows. The longer the wicks, the more pronounced the market’s indecision. When they extend both above and below the doji’s body, as in the example below, a doji may mean traders are pausing to take some profits off the table in the midst of a trend; they may either re-enter the market for additional profits, continuing the trend, or exit entirely, allowing it to reverse.
Another type of doji, the gravestone, is formed when the open, close, and low prices are all at or about the same point, but a high is formed somewhere above. This means that bulls managed to push the price up during the time period, but were unable to sustain the advance, and the bears managed to push the price back down to its original starting point.
When the gravestone doji forms during an uptrend, it means the bulls may be running out of steam and the rally is in jeopardy. When it forms during a downtrend, it means the bears could not control the action any longer and bulls are entering the market. In either case, a trend reversal could be in the works, although confirmation should be found prior to entering a trade.
Here is an example of a gravestone doji (within the blue circle) signalling the end of an uptrend:
Another type of doji, the dragonfly, is the opposite to the gravestone. In the dragonfly doji, the open, close, and high prices are all at or about the same point, but the low formed somewhere below that level, creating a doji that looks rather like the letter T. In forming this doji, bears began the time period in control of the market and pushed the price down to a low, but were unable to sustain the rally; bulls entered the market and pushed the price back to its starting point.
If the dragonfly doji forms at the end of an uptrend, bulls were unable to force the price to a new high and unable to sustain momentum. If it forms at the end of a downtrend, bulls entered the market in time to prevent the downward rally from continuing. In either case, the current trend is in jeopardy although, again, confirmation should be found prior to entering a trade.
Here is an example of a dragonfly doji at the end of a downtrend:
Doji, and the tales their tails tell, can be valuable indicators of market sentiment for the technical analyst of forex trading.
