Doji is a very basic and extremely important candle pattern that every trader trading in Japanese candle pattern must know. There is a lot to say about this candle. Doji in Japanese means "unchanged". The special thing is that this "unchanged" sometimes can create big turning points for market trends.
There are many types of Doji candles and the usage is quite diverse so we will introduce you to all about this model through 2 articles. In this first article, we refer to the two most basic types of candles: regular and long-tail doji.
What are long-tailed doji and doji?
A doji is a candle with an opening and closing price equal or close to each other. This is considered an important reversal signal at the top / bottom of the trend.
There are 5 popular types of Doji candles, including:
- Doji Star or Neutral Doji (Standard Doji / Normal Doji / Short Shadow Doji)
- Long legged Doji (Long-legged Doji)
- Dragonfly Doji (Dragonfly Doji)
- Gravestone Doji (Gravestone Doji)
- Four price Doji (Doji 4 prices as one)
Doji candles when in the right context can give a good reversal signal.
Characteristics of long-tailed Doji and Doji
A Doji Star candle has the following characteristics:
- The body of the candle is very small, which means that the opening price is extremely close to the closing price
- The upper shadow is almost equal to the small and even short shadow
- Shape like a cross or a plus sign (+)
Meanwhile, long tail Doji candles have the following characteristics:
- The body of the candle is very small, which means that the opening price is extremely close to the closing price
- The upper and lower shadow is very long
The long-tail Doji and Doji candles show indecision, especially the long-tail Doji candle shows that the market has just experienced strong struggles but in the end it could not move the price.
Doji usually shows reversal signals, but you need to pay attention to Doji candles jumping, which means creating a gap (previous correction). If the next candle is a strong trend candle, then the Doji pattern will not show a reversal signal. You can see the illustration below to better understand
Psychological evolution of the long-tail Doji and Doji models
When the buyer is stronger than the seller, the price increases, when the seller overwhelms the buyer, the price decreases. When the market continues an uptrend, the excitement of the participants can help keep the price moving in that direction. However, when the insiders begin to take profits and the outsiders start to trade in the opposite direction, the buying and selling sides become balanced, neither side can win, the Doji candle will appear.
Real examples of long-tail Doji and Doji models
We have selected a chart that has both a regular Doji and a long-tail Doji candle to illustrate below. This is a daily chart of EURUSD and you can see that the pair created two consecutive Doji candles, the first one is a regular Doji and the second is a long-tail Doji.
A guide to dealing with long-tail Doji and Doji models
There are many ways to trade with Doji candles. However, traders should look for additional additional signals to increase the probability of success. But keep in mind that a transaction with a 90% chance of success will have a 10% chance of failure. Therefore, you also need to have a strict risk management strategy, set a reasonable stop loss.
Entry point command
In theory, you can enter the order as soon as the Doji candle is created on the top / bottom of the trend. But in fact we need to be more careful.
Take a look at the GBPUSD chart below, the Doji candle appears at the bottom of a downtrend. This shows that both buyers and sellers, neither side can control the situation and the trend is reversible.
At this point, you need to use some other indicators to support the reversal signal. In the illustration below, the Stochastic indicator has been used to identify oversold areas. Thus, we will enter the order after the Doji candle is created or to be more secure, wait for another reversal confirmation candle before entering the order.
One point to note is that before the previous 5 sessions also a Doji candle was created. But we do not enter the command here because there is no additional support element. Stochastic at this point is not in the oversold area.
Stop loss
A stop is placed at the bottom of the Doji if trading is on the upside and on top of the Doji if the trade is reversing. However, for long-tail Doji with too large shadows, you should set a stop loss at ½ or ⅔ of that Doji.
Profit-taking point
Profit-taking points should be set at resistance levels. After determining the profit-taking point, you need to calculate the risk / reward ratio to consider whether or not you should enter the order. The minimum risk / reward should also be 1/2
What to do when 2 Doji candles appear consecutively?
Above, we have considered the transaction example when the individual pattern appeared. In fact, there is no shortage of cases where two Doji candles appear consecutively, a short shadow Doji with a long tail Doji as shown below.
Two Doji candles, when placed next to each other, signal a stronger reversal. Below is the GBPZAR pair chart, here we can enter the SELL command at the bottom so Doji. The stop will be a little above Doji's peak, and profit-taking will be at the nearest support level. After entering the order, the price moves in the expected direction with very strong momentum, shown by the slope of the chart. The smart strategy here would be to use trailing stops.
Epilogue
Doji is an important and fundamental candlestick pattern in the Japanese candlestick model. There are 5 common types of Doji candles, in this article we have introduced the characteristics and usage of the first 2 types. When using this candlestick pattern, you should incorporate a number of other factors as well as flexible analysis with the market situation.
You have just read the article: "The long shadow Doji and Doji candlestick patterns"
Author: Tin Nguyen
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