Doji is another common candlestick in Forex markets. It is characterized by a very small body with long tails on either side. The body of a doji candlestick is normally very small almost equal to a single line and it is hard to distinguish the opening price from the closing price.
It is not a must that the upper tail is equal to the lower tail; one may be longer than the other. It will depend on the market dynamics. Depending on the length of the tails, there are four different types of doji candlesticks.
Alone, doji candlesticks are usualy very neutral since the show that the forces pressing the market up and those pressing the market down have equalized.
The psycology of a doji
The doji candlestick is a great indicator of a pending reversal pattern. Contrary to the hammer, doji can signal a bearish as well as a bullish reversal pattern.
It normally potrays the contending buying and selling pressures, each pusing to be the dominating force but only to be equalled out by the other. However, if a doji happens during a specific trend, itmeans thatthere is a very high likelyhood that that trend will change.
If a doji forms during a bullish trend, it signals that the buying pressure that was previously prevailing in the market has met a considerabe selling pressure whch has equalled it. Therefore, it is most likely that the subsequent candlestcicks will form as a reversal to the bullish trend thus forming a bearish trend.
Similary, If a doji forms during a bearish trend, it signals that the selling pressure that was previously prevailing in the market has met a considerabe buying pressure whch has equalled it. Therefore, it is most likely that the subsequent candlestcicks will form as a reversal to the bearish trend thus forming a bullish trend.
In mnost cases, the doji will form during a market consolidation after which the market is expected to breakout in eiher of the directions (either downwards or upwards).
Types of doji candlesticks
- Neutral Doji: it is characterized by opening and closing prices that are virtually equal. The tails on either side of the body are equal.
- Long-Legged doji: This is characterized by extra-long tails on either side of the body. It normally signals that the markets have a very great indecision about the future direction of the trend.
- Gravestone doji: this looks like an inverted hammer with the only difference being that the body is very small with the opening and closing levels being on the same level. It has long tail pointing upwards that is formed after the selling pressure forces a bullish candlestick back to its opening price before it closes. It may be seen as an indication of the onset of a bearish reversal but the trader should be very careful to determine whether the subsequent candlesticks will be bearish or not.
- Dragonfly: this is the opposite of gravestone and it resembles a hammer candlestick with the only difference being the small body. It has long tail pointing downwards that is formed after the buying pressure forces a bearish candlestick back up to its opening price before it closes. It may be seen as an indication of the onset of a bullish reversal but the trader should be very careful to determine whether the subsequent candlesticks will be bullish or not before placing any order.
Should a trader use the doji to place trades?
As mentioned above, a doji is usually very neutral. However, it signals the likelihood of a trend reversal. Therefore, it is should not be taken as a go ahead for either placing a sell or a buy order.
Actually, a doji will indicate that the market is undecided on whether to move up or down. The bullish and bearish forces are struggling to see which will overpower the other. It is normally during a market consolidation and the trader should anticipate a breakout on either side. Strategies like hedging can be employed in such scenarios.
On the other hand, you could use triangle patterns to determine the type of breakout that occurs so as to help in determining the type of order to place.