Doji Candles - Best Trading Guide
Updated: Mar 23, 2021
Doji candles are one of many "candle stick formations". All this means is, within the given time period of the candle stick, the opening and closing prices are virtually the same.
Any candlestick which has what appears to be the same opening and closing price qualifies as a Doji.
Table of Contents
The 5 Types of Dojis
The Regular Doji or the Doji Star demonstrates that price created both highs and lows while closing at the same level. It is a low volatility Doji pattern and It also does not indicate any change in sentiment or bias in any particular direction. Other factors market factors would make the Doji star bearish or bullish in its bias.
The Long-Legged Doji pattern is usually an indicator of an increase of volatility if the doji candlestick is larger than the other candlesticks on the chart. This Doji candlestick is similar to the regular Doji.
If the long-legged Doji is the same size as other candlesticks on the chart, then it simply represents price consolidation on the lower timeframes.
The Four-Price Doji indicates that there was virtually no movement in price during this timeframe. Its opening, high, low and close prices are virtually the same.
The Dragonfly Doji candlestick pattern
is usually interpreted as a signal of rejection of lower prices and as a bullish Doji pattern. Price would have gone down then come up and settled at the opening price in the market. It is sometimes also called The Hammer Doji.
The Gravestone Doji typically indicates that price has made an attempt to move higher but was rejected within this timeframe. Many traders use this as an indicator that the market may be ready to move lower and that there has been a shift from a bullish environment to a bearish one.
Some traders see The Gravestone Doji and The Dragonfly Doji as support becoming resistance and resistance becoming support according to market context and where the Doji appears. This is all a matter of context and perspective.
Is Doji a Reversal Pattern?
Unfortunately, there are misconceptions about candlestick formations and what they indicate. In this article, we will look inside of the candlestick to explore exactly how these patterns are formed and what they could mean. There is no magic in these patterns and that they are actually quite simple. But first, we must begin by understanding Timeframes.
A brief revision on timeframes and market hours for one moment will bring clarity.
Once we understand what to associate with each timeframe, then we know what the implications of price patterns are.
Monthly & Weekly Chart - Hedgefunds, money managers, investors, big money, smart money. They trade on larger timeframes because they run large amounts of capital and take a long time to get in and out of positions.
If a Doji forms on a monthly chart, then look to the weekly price action, if it forms on the weekly chart, then look at the daily price action.
Daily Chart - This represents a full cycle of sessions around the world. Every major financial hub in the world would have contributed to the price changes at this point. Eight hours represents the length of one trading session.
— ( For more on Market Sessions check out our awesome article covering it in detail)
Anything smaller than the eight hour timeframe represents the intraday traders.
Intraday traders who trade the 1 hour charts, would see a Doji and understand that it means that the market participants on the lower timeframes would have caused that formation. That would be the scalpers, day traders and bots.
Any pattern formed on any candlestick simply represents a variety of movements on lower timeframes. What those movements represent are more important than the candlestick pattern on the higher timeframe.
This applies across timeframes because markets are fractal. For more on fractal markets, check out our article on explainer and guide to Elliot Wave Theory
Are Doji Bullish or Bearish?
USDRUB ---- 4hr chart (feb 2nd 2021)
The image above is a Doji formation on the four hour chart. But Dojis consist of different market structure formations on lower timeframes which each have their own implications.
USDRUB 1HR Chart (Feb 2nd 2021)
Looking inside of the initial 4 Hr Doji candle through the 1 hr timeframe. There we can see that nothing of significance occurred. The market could have easily gone either up or down. However, price consolidated and formed a base level of support.
USDRUB 15 minute (Feb 2nd 2021)
This is the same chart viewed on the fifteen minute timeframe. Here we can see the same information in more detail. Price only really had 3 large candles and those candles within that 4 Hour time horizon and which formed the wicks of the dojis on the higher timeframes.
The Doji does not matter, as much as what happens inside the Doji 💭
GBPUSD August 16, 2020 weekly chart
This is a Gravestone Doji formation on the GBPUSD weekly chart. It was also near to a resistance level. However, this did not signal a bearish move for the next candle, nor the following candle.
-GBPUSD August 16th-20th 2020 daily candle sticks
This is the daily candlestick price action within that weekly chart gravestone Doji. I'm sure it looks less magical and less like the next secret ingredient to a magical trading system when its no longer a clean pattern on the weekly chart.
But lets look at the same data displayed on a line chart.
GBPUSD August 16th-20th 2020 daily Line Graph
This looks very different without the patterns on this line chart. I see a double top, which suggests the sell signal as well, which is supportive of the idea of the Gravestone Doji. But what if I mark up this chart? I would get many possibilities through subjective technical analysis.
AUDJPY Daily - 24, Dec. 2020
On this chart, there are two Doji Candles, the Four-Priced Doji, followed by the Long-Legged Doji. This seems to be an excellent buy signal. Price is trending upward and simply stalled. But let's look deeper.
AUDJPY H4 24 Dec. 2020
Sellers would have stepped in during the second candle within the red circle (our area of focus). However buyers would not have let price fall too far. This would represent a tension between buyers and sellers battling for a price level.
Note: See how many Dojis appear? within our area of focus, there is yet another Four-Priced Doji. I have also highlighted in green two more Doji Patterns. A Dragonfly Doji and a Long-Legged Doji. Feel free to zoom in on that pair and see what information it yields 💡✍🏽
AUDJPY H1 24, Dec. 2020.
There was brief dip which ended with a long wick at the candle which got to the lowest price during this pullback. On an uptrend, with strong fundamental bias to the upside, plus volume to support the move, this would be a fair time to look for a buy entry.
What Does a Doji Indicate?
Doji size matters but this is only compared to the average volatility of the market at the time.
A Doji pattern with long wicks but those wicks are the same size as the average bar in the market suggests that a lot of movement was taking place.
A doji candlestick with wicks much longer wicks than the rest of the candles around it forming a long-legged Doji, would mean that something is happening in the markets and there is a sudden increase of volatility.
A Gravestone Doji or a Dragonfly Doji with wicks that are larger than the rest of the candles surrounding it would suggest that Price is doing something interesting on the lower timeframe. Possibly some support and resistance action happening depending on the market structure or maybe a news event.
A smaller Doji star pattern may represent a number of things according to the market context.
Doji patterns do give traders a signal. That signal is to look deeper and see what you can find out on the lower timeframes! 🔎
Dojis & Fundamentals
Dojis form under varying fundamental market conditions. It got its nickname as "An Indecision Candle" but often a survey of the underlying fundamental drivers may also highlight why this "indecision" is taking place.
During some periods, there are less market participants and markets stagnate. Other times, there may be significant shifts in sentiment as a result of flash news, sudden headlines, or as we saw throughout Donald Trump's tenure as president of the United States, a simple tweet.
Sometimes, flash news does not affect the market trend, rather, they create temporary volatility. This may create a sudden news spike on a lower time frame. Then the original bias may continue to influence price direction once again, This may cause the creation of Dojis and other candlestick formations.
Trading the Doji
Anything can be incorporated into a larger set of rules in a trading system to help refine an edge. A quick search will show you many articles demonstrating exactly where you should buy or sell based on the appearance of Doji patterns.
What those articles are omitting however, is context. In a bear market, with bearish fundamentals, and bearish sentiment, if a retracement occurs with low momentum and any candlestick formation shows up it would indicate a sell entry according to the rules of your system.
In a bullish market, with bullish fundamentals and sentiment, if a Doji appears at support, then do you think its the Doji? or is the Doji an indicator of what is actually happening
In competitive trading markets, traders need not just one edge, but a stack of various factors which each provide an edge in the markets. In creating a system involving Dojis or taking entries with Doji patterns, a proper understanding of what they are is first required.
Any system with rules that are too simple, will lose or has already lost its edge if it can be programmed easily into an algorithm❗
This is why understanding market fundamentals first, and incorporating those fundamentals with an accurate understanding of price data can stop retail traders from making poor decisions and getting caught on the wrong side of the markets.
7 rules for using a Doji Candlestick Pattern
Fundamental Bias is established.
Commitment of Traders data suggests that hedgefunds are positioning themselves in accordance with the fundamental bias
Market begins a move in the desired direction or is already trending in my desired direction on larger time frames and I begin looking for entries on a smaller timeframe.
Smaller timeframes show a pullback to market structure levels
On that pullback, a Doji candlestick forms, near structural support & resistance or supply & demand.
Maybe a chart pattern may form as a part of the structure for the Doji pattern as well.
I would then place a buy order at the close of that Doji candlestick formation using ATR based stop loss and take profit levels.
Dojis by themselves, like anything else, any indicator, any price action or candlestick pattern is not enough to refine an edge. Dojis don't generate trade ideas, nor do they give any idea of how to place stops and targets.
No single element of a trading system provides enough information to create an intelligent trade ✍🏽✍🏽✍🏽
What Happens after a Doji?
Some homework. Go to investing.com and follow the chart pattern indicator. Using a timeframe that you are comfortable trading with, when a Doji pattern shows up. Simply watch it and see what it does.
Do this until you have a reasonable sample size of around 100 Doji patterns. Check out the flow chart below to understand the types of questions you should be asking and results you should be tagging.
Conclusion
Now that you have discovered the magic of Doji candles, you are ready to tackle the markets...provided of course that you have learned how to interpret sentiment, market trend, structure, fundamental data and everything else that goes into providing context around the Doji candle and any other candlestick or price action pattern you may encounter.
It is a combination of all of these things which provide accurate, high probability trade ideas and entries with quality risk/reward ratios with edge in the markets to help you become a consistently profitable trader. At LogikFx we use Global Macro Trading to create that edge. Feel free to check out or education here at LogikFx for more on how you can use our LITA technology to understand market fundamentals.
Doji candles are very intriguing indeed especially when you consider the situation in which they form. As you've mentioned a doji candle alone can't be the sole basis for reacting to a market. Fab article. Loved digesting the doji info!
Great article, very informative on the different types of dojis and what they represen 👍🏽
Doji candles are interesting, they're essentially representing a torn sentiment between buying and selling pressure. A bit like a tug of war. I do believe when these occur at the top/ bottom of trends, alongside a predisposition of fundamentals, they can be great timing tools.
Love the infographics btw Warren.