What is Doji?

A Doji is a candlestick pattern that signifies indecision in the markets. It occurs when the opening and closing prices of an asset are nearly identical within a specific time frame. 

In the formation, the candlestick has a very small or nearly non-existent body, with only upper and lower wicks visible. It indicates that the balance between buyers and sellers has not shifted, and both sides remain undecided. 

A Doji pattern often suggests that a trend may be coming to an end or that a strong directional change in the market is imminent. However, it should not be considered as a standalone signal and should be evaluated alongside other technical indicators. They can be observed in both bullish and bearish trends.

What Does a Doji Tell Traders?

The Doji formation indicates to traders that there is indecision in the market and that the balance between buyers and sellers has not shifted. This situation can signal that a trend is about to end or that the market may be preparing for a reversal or breakout.

Especially after a strong upward or downward trend, the appearance of a Doji suggests that traders should review their positions and be prepared for a potential trend reversal.

What Does Red Doji Mean?

A Red Doji is a candlestick pattern where the opening and closing prices are very close to each other, but the close is slightly lower than the open. The formation indicates market indecision, with sellers having a slight advantage. 

It is often interpreted as a bearish signal and, when it appears at the end of an uptrend, can serve as a warning sign for traders.

What Does Green Doji Mean?

When the opening and closing prices of a candlestick pattern are extremely near to one another, but the close is slightly higher than the open, it is known as a green dagger. This formation shows a little edge for buyers and a balance between sellers and buyers. 

When a Green Doji emerges at the end of a downward trend, it may be interpreted as a possible positive indication.

How is Doji Formed?

A Doji forms when the opening and closing prices of an asset are nearly the same during a specific time period. For the formation to occur, prices move both upward and downward during this period, but the closing price ends up very close to the opening price. The body of the candle is quite small, almost imperceptibly thin.

When Does Doji Appear?

Doji usually shows up when the market is uncertain. It frequently occurs when the market is looking for direction or following a strong trend. It signals that a trend is waning and a possible reversal may be approaching when it emerges near the end of a bullish or bearish trend.

Furthermore, Doji is a common indicator of sideways markets, indicating that buyers and sellers are in balance and that the market is undecided. When predicting the future direction of the market in such circumstances, traders are advised to exercise caution by the Doji formation.

What are the Types of Doji?

There are 6 types of Doji candles, as listed below. However, please note that only the first 3 are relatively important.

1. Gravestone
2. Dragonfly
3. Long Legged
4. Standard
5. Price
6. Neutral

Gravestone Doji

The Gravestone Doji is a formation where the opening and closing prices occur at the lowest point of the day. The upper wick is long, while the lower wick is nonexistent or very short. This formation shows that buyers were unsuccessful in pushing the prices higher and that sellers have taken control. It is typically seen at the end of an uptrend and is considered a bearish signal.

Dragonfly Doji

The opening and closing prices of a candlestick pattern known as the Dragonfly Doji happen at the peak of the day. The upper wick is either very short or nonexistent, while the lower wick is long. This pattern suggests that although sellers dominated the session, purchasers took back control and drove prices higher at the end. At the conclusion of a downward trend, it could indicate a possible bullish reversal.

Long Legged Doji

The Long Legged Doji is a formation in which the upper and lower wicks are both lengthy, yet the opening and closing prices are quite near to one another. This shows a state of uncertainty and equilibrium between buyers and sellers. It usually indicates market uncertainty and can occur near the end of both uptrends and downtrends.

Standard Doji

The Standard one has short upper and lower wicks and almost equal opening and closing prices. This can occur at the end of any trend and indicates market indecisiveness. 

Even though the Standard Doji by itself might not give off a strong signal, it should be used in conjunction with other indicators.

Price Doji

The Price candle has short wicks and a very small body. It suggests that there is equilibrium between buyers and sellers because the price movement has happened within a very small range. 

The Price Doji is a symbol for uncertainty and stagnation in the market.

Neutral Doji

The pattern known as the “Neutral” has nearly equal-length wicks on both sides and identical opening and closing values. It denotes a state of perfect equilibrium between buyers and sellers and indicates uncertainty in the market. 

The market's future move is not clearly indicated by this kind of Doji.

Doji Candle Pattern Example

Let's analyze the chart together to understand the Doji pattern:

• Doji candles are candles where the opening and closing prices are very close to each other. This indicates indecision in the market.
• In the chart, on the 5th day (the middle candle), the Doji candle represents where the opening and closing prices are nearly the same.
• On that day, there is a difference between the high and low prices, but since the opening and closing prices are the same, it means no clear decision has been made regarding the market direction.
• In the previous days, there were clear directional trends, but on Doji day, market indecision emerged.
• It is generally interpreted as a signal of a potential reversal or a pause in the current trend. In this scenario, there was an uptrend before and on the Doji day, the market remained indecisive. Both may indicate a potential trend change.
• During the candle, the high and low prices are important because this price range shows the market's volatility. The candles that form immediately after the Doji can provide clues about where the trend might be heading.

Advantages of Doji Pattern

• Doji candles indicate times of indecision in the market. They can signal that a trend is ending or that a reversal might occur.
• Especially if they appear at the end of a clear trend, they provide clues that the trend direction might change.
• Since they show indecision at a certain point, investors can manage their positions more carefully to reduce risks.
• They show that there is a balance between buyers and sellers, with neither side gaining an advantage. This provides investors with insights into the future direction of the market.
• While they do not provide definitive results when used alone, they can offer more reliable and stronger signals when combined with other technical analysis tools.

Limitations of Doji Pattern

• When they are used alone, do not determine a clear direction in the market.
• They do not always signal a trend reversal. Indecision during market fluctuations can be normal and may give misleading signals.
• Relying solely on a Doji to make decisions can lead to inaccurate outcomes.
• Sometimes, it may only indicate short-term indecision and may not be a significant signal for long-term investors.
• Not every Doji means that a trend will change. The candles can also appear during times when the current trend continues.

FAQs About Doji Patterns

Does it matter if a Doji is red or green?

In general, the color of a Doji candle (red or green) is not very critical. However, a red one indicates that the closing price is slightly lower than the opening price, showing that sellers have a slight advantage. On the other hand, a green one means the closing price is slightly higher than the opening price, giving buyers a small edge. 

How accurate is the Doji pattern in technical analysis?

The Doji pattern can indicate indecision in the market and potential trend changes. However, when used alone, it’s not considered a very strong signal. The accuracy of the Doji depends on the context in which it appears and how it is combined with other technical indicators.

What does 2 Dojis in a row mean?

When two Dojis appear consecutively, it signals significant indecision in the market. It indicates a strong balance between buyers and sellers, with market direction being uncertain. In such a situation, a large movement can be expected, though it’s unclear which direction the market will move.

What does 3 Dojis in a row mean?

Three consecutive Doji candles suggest a strong pause or indecision in the market. This pattern typically signals that a trend has stalled, or that the market is preparing for a large movement. The appearance of this pattern in a row is quite rare, and it is often followed by a strong breakout.

Is a Doji a bullish reversal?

Doji candles are not inherently a bullish or bearish reversal signal. However, if it appears at the end of a downward trend, it can be a potential signal for a bullish reversal. Still, the signal should be confirmed by subsequent candles and other indicators.

What is the difference between a Doji and Spinning Top?

The main difference lies in the size of their bodies. Doji candles have almost identical opening and closing prices, resulting in a very small or nonexistent body. Spinning Tops, on the other hand, have a more noticeable body, meaning there is a slight difference between the opening and closing prices.