A Doji candlestick, also called a Doji star, shows indecision between buyers and sellers in the crypto market. This type of candlestick is confirmed in the technical analysis chart when the opening and closing prices are almost the same.
What is a Doji pattern on a candlestick chart?
Simply put, a Doji indicates that buyers and sellers of an asset are alternating. In this way, attempts of buyers to raise the price are prevented by sellers. Similarly, attempts by sellers to lower prices are thwarted by buyers.
Finally, both sides bring the price to the pivot level. So, for example, when Bitcoin (BTC) opens and closes at $20,000 on a given day, even if its price fluctuates between $25,000 and $15,000 in a given 24-hour period.
Thus, the $25,000 price level – or intraday high – represents the upper wick of the Doji, and the $15,000 price level – the intraday low – represents the lower wick of the candlestick.
How does a doji candle work?
Doji candlesticks have historically helped traders predict market bottoms and tops as a kind of calm before the storm.
For example, a Doji candlestick formed during an uptrend can indicate the end of the uptrend, i.e., more buyers switching to sellers, which usually leads to a trend reversal.
It is worth noting that a Doji pattern does not always mean a trend reversal. Instead, it shows indecision among traders about future trends.
So, it is better to confirm the Doji candlestick signal with the help of additional technical indicators. For example, a technical indicator such as the relative strength index (RSI) and/or Bollinger bands may give more weight to what the Doji pattern suggests.
Related: 5 More Bullish Candlestick Patterns Every Bitcoin Trader Should Know
Types of doji patterns and their trading
Doji patterns can vary depending on the position and length of the shadow. These are the most popular variations:
Neutral Doji
A neutral Doji consists of a candlestick with an almost invisible body in the middle of the candlestick, with upper and lower wicks of similar length. This pattern appears when bullish and bearish moods are balanced.
Traders can combine the neutral Doji with momentum indicators such as the RSI or Moving Average Convergence Divergence (MACD) to help identify potential market tops and bottoms.
For example, a neutral Doji event in an uptrend coinciding with an overbought RSI (>70) may signal an imminent market correction. Similarly, when the RSI is oversold, the candlestick occurs in a downtrend (
Long-legged Doji
A long-legged doji has longer wicks, indicating that buyers and sellers are aggressively trying to control price action at some point during the candle’s duration.
When identifying a potential long-legged Doji, traders should carefully monitor the closing price of the candlestick.
In particular, if the closing price is below the middle of the candle, especially near the resistance levels, the Doji is a bearish signal. Conversely, if the closing price is above the middle of the candle, it is bullish because the formation is similar to a bullish pin bar pattern.
If the closing price is exactly in the middle, this can be considered an example of a trend continuation. In this case, one can always refer to previous candles to predict future trends.
Like the Doji
Dragonfly Doji appears as a T-shaped candle with a long lower wick and almost no upper wick. The open, close and high price are almost at the same level.
If the Dragon Doji pattern forms at the end of a downtrend, it can be considered a buy signal as shown below.
On the contrary, the formation of a candle during an upswing indicates a potential reversal.
Tombstone Doji
Tombstone Doji represents an inverted T-shaped candlestick that coincides with an open and closed low. The candlestick indicates that buyers are trying to push the price up, but are unable to sustain the upward momentum.
When the Tombstone Doji appears in an uptrend. can be considered an example of reversal. On the other hand, its occurrence in a downtrend indicates a potential upside pullback.
Four Price Doji
The Four Price Doji is a pattern that rarely appears on a candlestick chart except in low volume conditions or very short periods. It should be noted that this appears to be a negative sign and indicates that all four price indicators (open, close, high and low) are at the same level during a given period.
That is, the market did not move during the period covered by the candlestick. This type of Doji is not a valid pattern and should be ignored. It simply indicates a moment of indecision in the market.
How reliable is the doji candlestick pattern?
The doji candlestick pattern may not provide the strongest buy or sell signals in technical analysis and should probably be used alongside other indicators. Nevertheless, it is a useful market signal to consider when measuring the degree of indecision between buyers and sellers.
Building a trading strategy based on doji candlestick patterns is best suited for experienced intermediate or professional traders who can easily identify and accurately interpret given signals.
This article does not contain investment advice or recommendations. Every investment and trading action involves risk and readers should do their own research before making a decision.