Trading Strategy

All About Different Types of Doji Candlestick Patterns

January 30, 2022 | 4:45 pm | The 5%ers' Blog > Trading Strategy
January 30, 2022 | 4:45 pm
The 5%ers' Blog > Trading Strategy
All About Different Types of Doji Candlestick Patterns

Top Doji Candlestick Patterns That All Traders Must Know

Doji is a candlestick chart pattern that appears when the price rises or falls during a trading session but closes very close to where it started. There may be trading opportunities in different types of doji candlesticks since buyers and sellers seem to be indecisive.

Doji candles appear in various forms and sizes on candlestick charts. Each Doji provides the traders with a unique set of data points in a chart. Dojis may be anything from a + sign to a T or an upside-down T. In certain cases, a Doji candlestick may indicate that the price is on the verge of a high or low. It also indicates that the price may fluctuate in a range at other times. To correctly analyze the Doji, it is necessary to analyze its place within a trend.


What is a Doji in trading?

A Doji notifies traders that buyers and sellers were equally balanced at the close of the day, but this might have significant ramifications. While sellers controlled and drove the price down, a Doji shows that buyers could hold on to their positions. Dojis can indicate both bullish and bearish price reversals in an asset’s value.

The thick body of a candlestick shows the opening and closing prices. If the close is higher than the open, the candle is colored white or green. The candle is colored red or black if the open is below the close. The tails or thin lines above and below the candle’s body reflect the peak and low prices recorded throughout the candle’s period. This period’s buying and selling strength may be deduced from each candlestick chart pattern. Look for long green or long red candlesticks on the chart to determine if buyers or sellers were active.

Candlestick traders rely on this data to make decisions and devise trading plans. To determine what each kind of Doji means, we may look at the highs and lows of the trend and the Doji’s position inside it.


Structure and types of Doji candlestick pattern

A Doji candle’s wicks are either exceedingly little or nonexistent. This pattern might appear at the bottom of a downturn or the top of an upswing.

While some may see this as a hint of an oncoming market turn, others may interpret it as a sign of doubt about the price’s future move. Consequently, some observers have labeled Doji a “transitional” structure. Price indecision and price neutrality are conveyed by Doji candles and spinning tops.

There isn’t much difference between these two except for their size and length. In addition to the normal or ‘neutral’ Doji candlestick, there are three types of Doji candlesticks depending on the beginning and closing prices:


Dragonfly Doji

A dragonfly Doji candlestick pattern is generated when the open, high, and close prices of a candle are all the same or very close to each other, but the low price is substantially lower than the other three values. Dragonfly Doji is a rare find. However, a few price variations are acceptable to most traders.

Nonetheless, at the end of trading, prices had rebounded to where they had been at the outset. It notifies traders that the price has returned at the end, indicating that the bull market is still going strong. On the chart of the US SPX 500 index below, a dragonfly Doji can be seen:


Dragonfly Doji pattern


The Dragonfly Doji occurs after a small fall in an otherwise rising trend. As the market rises, the dragonfly Doji on top of recent candles indicates that the selling is reducing, and the bulls are reasserting themselves. If the price rises after the dragonfly Doji, this interpretation of the price movement is verified.


Gravestone Doji

The gravestone Doji is an upside-down variation of the dragonfly Doji pattern. Because the prices are so similar, it’s difficult to see the difference between the high and low ones. Buyers gave up all of their gains after a strong start, and sellers pushed the price all the way down to the open, culminating in a “gravestone Doji.”

Bearish Gravestone Doji

Bearish Gravestone Doji patterns are prominent at market tops because they form when overbought. The Natural Gas price chart below shows a gravestone Doji as the asset’s price continues to decrease in a downtrend. A gravestone marks the end of the upper withdrawal after a retreat to the upward. As the market swings south, the tombstone Doji signals that the bears have regained control.


Gravestone Doji pattern


Long-legged Doji 

Long-legged Doji occurs when the open and close prices are identical, but some significant highs and lows cause long tails. Because the bulls and bears both swing up and down a lot, a long-legged Doji pattern indicates ambivalence because neither side makes any meaningful gains.

As demonstrated by a bearish long-legged Doji, uncertainty may suggest that the bulls lose control after a large advance. As a result, short-term traders may be tempted to place short positions if the market continues to fall following the pattern. This kind of candlestick might indicate that the bears are losing momentum. Conversely, a rise in the market might tempt traders to put long bets if this trend continues.

Traders may still be unsure about the market’s direction, as seen by the long-legged Doji. Nevertheless, it confirms the likelihood of further migration in the other direction.

The price chart below shows a long-legged Doji candlestick pattern, implying a short-term top after a strong surge. Since the open and closing prices differ slightly, this candle is also known as a spinning top.


Long-legged Doji pattern


Hammer Doji

As prices decline, the “hammer” shape of the Doji candle emerges. When the price opens, drops, and closes at or around the opening price, a hammer Doji candlestick is produced. Based on this chart pattern, buying pressure seems to be developing towards the lows.

Doji designs with hammers are rather unusual. A glance at the price chart of the UK 100 index indicates several price patterns that occurred around the bottoms. The price should climb once the hammer shuts, confirming the pattern. There are three scenarios where the price grows, and one does not.

When a hammer pattern occurs after a price rise and the price continues to fall, it is referred to as a “hanging man.”


Dragonfly Doji pattern


Trading strategy of Doji candlestick pattern

Here are some ways to take advantage of the Doji pattern:

  • Placing a buy order above the Doji high and a stop-loss below the Doji low might be a possibility for a bullish Doji. The entry is triggered if the price moves higher, but the risk is limited if the price declines later.
  • A trader might place a short sell order below the Doji low and a stop-loss order above the Doji high for a bearish candlestick. Then, if the price falls, the entry is triggered, and the risk is managed if the price rises again.
  • A trailing stop-loss might be utilized to depart. To assess your prospect of winnings and losses, you need also consider a risk/reward ratio.


Summary of Different Types of Doji

So, patterns like Doji candles have a limited life span. They are only effective for anticipating short-term price swings rather than pointing to longer-term trends since they tend to endure for a single period. A price reversal that follows a Doji might last a long time or just a few sessions. Therefore, when trading Doji candlesticks, the data from each new candle must be analyzed frequently.

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