Candlesticks - Doji

Doji

Doji session has a horizontal line instead of a real body. This is because a doji is formed when the session's open and close are the same price (or almost the same). In essence the doji is echoing, on a micro scale, the indecision reflected on a more macro scale by the market's sideways action. However, a doji that emerges after the mature part of an uptrend or sell-off has a greater chance of a market turn.

One should be especially cautious about a doji that arises after a tall white candle which in turn appears after a significant uptrend. This is true whether the doji is within the prior long white real body or above it. Such action represents a disparity about the state of the market. Specifically the rally and tall white candles during such a rally tell us that the bulls are still in charge. But a doji means that the bulls are failing to sustain the upside drive.

Doji is meaningful when it arises after a tall white candle during an uptrend.

The top of a doji session (that is, the top of the upper shadow) often represents resistance. However, if the highs of the doji session are exceeded, then the market's uptrend should continue.

How do you decide whether a near doji day (i.e., where the open and close are very close, but not exact) should be considered a doji? One method is to look at a near doji day and compare it to recent action. If there is a series of very small real bodies, I would not view the near doji day as significant since so many other recent periods had small real bodies or doji.

While the doji can mean the market may reverse its prior trend, traders should view the doji as echoing a market in transition rather than being an outright reversal pattern. Based on this, traders should wait until the next session or two after the doji to show them which way the market will move.

If there is a doji during a rally, and if the market continues strong after this doji, it is a bullish indication since the market has resolved itself from the state of transition (as shown by the doji) to its new trend-up. Thus, while a doji that appears after a rally could be an indication of a reversal( sincet he market is at a crossroads),i t is best to wait for bearish confirmation over the next day or two to get a top reversal confirmation.

For those who sell on a doji, the doji should act as resistance. If the market closes above the high of the doji, the japanese say the market has become "refreshed." Based on this, a buy stop should be placed above the high of the doji. The opposite would be true with a doji in a downtrend. To wit, a doji in a downtrend shows that the market is at a point of indecision, and a white candle after such a doji shows that the market has resolved itself to the bull side. A buy based on the doji after a downtrend should have a sell stop under the doji's low (including the lower shadow). This is because such a scenario is viewed as a bearish continuation signal.

An important aspect about doji is that traders should look at where the doji appears in a trend. Doji in relation to the trend. The main concept behind doji, it is become more important as a reversal signal the more overbought or oversold the market.