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The Forex Doji Candlestick Pattern

What the Doji Candlestick Pattern Indicator Indicates

The utilization of candlestick patterns is a popular subset of price action trading. Candlestick patterns provide insightful analysis of market activity and can assist traders in positioning for the upcoming price move. There are literally dozens of distinct candlestick patterns available to traders. The Doji candlestick is a somewhat common formation within this class of patterns and will be the subject of this article.

The Doji Candlestick Pattern – What Is It?

A Doji  Forex candlestick pattern is defined in technical analysis as a single candlestick pattern in which the open and close of a specific instrument for a given period are nearly identical or extremely similar to each other. As a result, the appearance of a Doji is frequently in the shape of a cross or a variant thereof.

Because the Doji candle opens and closes almost identically, it indicates market hesitation. Bulls and bears are squabbling for control of the market, but none has been able to overcome the other and shift the market in their favor. Below is an illustration of a Doji pattern.

doji-candlestick-pattern

Unlike other candlestick patterns, which have a bullish or bearish interpretation, the Doji pattern is unique in that it does not give any clear insight into a security’s future price movement. In essence, the Doji candlestick pattern is neutral. They might occur as a continuation pattern, implying continued price movement in the direction of the trend, or as a reversal pattern, implying the likelihood of a trend reversal.

When the Doji formation is combined with the market’s underlying trend or other Forex technical indicators, we may glean a great deal of information and reach a bias for future price movement. Thus, while Doji candlesticks are not particularly effective on their own, they may be highly beneficial when combined with other tools.

The Doji candlestick is available in a variety of configurations. The Doji Star, Gravestone Doji, Long Legged Doji, Dragonfly Doji, and Four Price Doji are the most common Doji designs. In the following sections, we will describe and demonstrate each of these Doji varieties. Given that each of them has a unique potential based on the market situation, it’s critical to understand them in order to appropriately identify and label them on your price chart.

Some traders find the Doji formation challenging to trade since it does not deliver a clear bullish or bearish signal on its own. However, as you will soon see, there is much value that this pattern may give traders when properly examined and utilized. This is especially true when the market exhibits a Double Doji or Triple Doji pattern, in which the price series contains successive Dojis.

Doji Candlestick Patterns: There Are Several Types

Doji patterns may be found in all major markets, including foreign exchange, futures, and stocks. And they manifest themselves throughout a range of temporal scales, from the tiniest to the greatest. As previously said, the Doji pattern will have the same opening and closing price. This is a critical aspect of the Doji pattern.

Traders must exercise caution and discretion when determining the amount of disparity between the starting and closing prices that they will allow in order to recognize a legitimate Doji pattern. This is because the precise starting and closing prices for any one session are quite unusual; as a result, we must allow for some flexibility in this area.

Because the starting and closing prices are so close together, the Doji will appear to have a very small body and resemble a cross. Let us now discuss the various Doji patterns and their properties.

Doji Star 

The Doji star design resembles a cross. The opening and closing prices will be nearly the same, and the candle’s top and lower wicks will seem relatively short and equal in length. The Doji Star pattern shows market hesitation, with bulls and bears vying for power, but the market is now in a state of balance. The Doji star design is seen below.

doji-star-candlestick-pattern
Gravestone Doji 

The Gravestone Doji shape is an inverted T. Candlestick traders will know this pattern as a variant of the shooting star. The Gravestone Doji pattern, on the other hand, is a more forceful bearish reversal indication, since it opens and closes at or around the bottom following an upside rejection.

This is particularly true when the Gravestone Doji pattern appears in a market that is heading upward. This example indicates a possible trend reversal from bullish to bearish. The chart below illustrates the Gravestone Doji chart pattern.

Long-Legged Doji

The Long-Legged Doji design resembles the typical Doji star pattern in look. They open and shut at or near the same level, but the wicks on either side are bigger and spread out deeper within the Long Leg Doji pattern. This indicates a more volatile market since prices were able to move pretty far to the upside and downside.

The consequence is that the market remains indecisive, but with more volatility. This frequently results in significant price movements as prices break out from one side or the other.

The illustration below illustrates the Long-Legged Doji design.



long-legged-doji-candlestick-pattern
Dragonfly Doji

The Dragonfly Doji pattern is diametrically opposed to the Gravestone Doji design. That is, it appears in the shape of a T. The opening and closure of the candle occur at its high, with a reasonably lengthy wick to the bottom, indicating rejection of lower prices and a powerful closing for the bulls. Dragonfly Dojis resemble hammer candlesticks in appearance; but, the Dragonfly Doji can be a more potent indication, especially when it emerges near the bottom of a down-trending market. Prices are expected to rise following the completion of the Dragonfly Doji pattern. Below is an illustration of the Dragonfly Doji pattern.

dragonfly-doji-pattern
Four Price Doji

The Four Price Doji is a one-of-a-kind pattern. It appears as a horizontal line with extremely few or no upper or lower wicks. As such, this pattern indicates that the market is indecisive and exhibiting characteristics of a low volatility environment. This is because prices open and close in the same region or very close to it, with very little movement to the upside or downside during the session.

The Four Price Doji is far less common than the other Doji patterns discussed previously. Regardless, traders should use caution whenever this pattern occurs on the price chart. This is how the Four Price Doji appears.

4-price-doji-pattern

Trading Strategy for Double Doji

 

As previously said, the Doji pattern is indicative of market hesitation. As such, the majority of Doji patterns are relatively uninformative on their own. However, when a market forms numerous Dojis in a row, this might be an exceptionally advantageous opportunity to enter a breakout trade.

More precisely, keep in mind that most Doji patterns are suggestive of uncertainty, and so the appearance of two or three Dojis consecutively indicates a protracted time of indecision, which is likely to accelerate prices in the direction of the final breakout. This is because markets fluctuate between times of low volatility and periods of high volatility, as well as between periods of high volatility and periods of low volatility.

With this in mind, we’ll create a Doji trading strategy that takes advantage of the current market conditions. Our technique is based on the appearance of a double Doji pattern, which is defined as any two successive Dojis on the price chart. They should ideally be of the same Doji variety, although this is not required. This double Doji method is an extremely straightforward price action approach that requires only the existence of two consecutive Doji formations.

Thus, the following are the trading guidelines for the Double Doji setup:

  • A Double Doji pattern must occur towards the top or bottom of an uptrend.
  • Create a support line at the double Doji pattern’s low and a resistance line at the Double Doji pattern’s high.
  • Place an OCO order 1 pip above the resistance high and 1 pip below the support low. This will cancel the other order
  • Wait for a breakthrough above the resistance level to execute the buy-side of the order, or below the support level to execute the sell-side of the order. Place a stop immediately below the low of the double Doji pattern if the buy order is activated first. If the sell order is executed first, set a stop immediately above the double Doji pattern’s high.
  • We want to employ a two-tiered exit plan. That is, target one will be set to a height equal to the Double Doji pattern’s height. At Target 1, we will close out half of the position. Target two will be positioned twice the length of the Double Doji pattern. At Target 2, we will close off the second half of our position.

GBPUSD Bullish Doji Candlestick Trade Setup 

 

Now, let’s turn our focus to some genuine instances of the Doji pattern in action on a few price charts. We’ll examine a couple of Forex Double Doji patterns.

As shown in the price chart below, the price of GBPUSD was trading downward, followed by a period of consolidation until another price level was reached, resulting in the development of a double Doji pattern. The double Doji pattern is highlighted in green. As a result, the first requirement of this Doji trading method has been met. At the bottom of the downtrend, a double Doji pattern has developed.



double-doji-strategy

We will now design the double Doji pattern’s support and resistance lines. Take note that the second candle within this double Doji pattern is placed at both the pattern’s high and bottom. As such, we will draw our support line at the candle’s low and our resistance line at the candle’s high, thereby establishing our breakout levels

After plotting our breakout levels, we will issue an OCO order, which cancels the previous order, with a buy stop one pip above the high and a sell stop one pip below the support line’s low. After that, we’ll wait to observe which direction the price activity takes.

As can be seen, the third bar following the development of the double Doji pattern signified an upside breakout, executing the buy-side of our OCO order and placing us in a long position in the currency pair. As a result, we’re going to set a stop loss right below the low of the double Doji pattern, as seen on the chart.

As an exit strategy, we will use a two-tiered goal, with the first exit occurring when the price reaches the equal distance of the double Doji pattern. Take note of the second orange bracket, which indicates Exit 1. The price quickly reached this level and proceeded to rise. Exit 2 is seen just above Exit 1 and is twice the length of the double Doji pattern. Again, the price swiftly hits that level following the achievement of Exit 1, thus exiting the position with a tremendous outcome.

 

USDCAD – Bearish Doji Candlestick Trade Setup

Consider another instance of this method in action. This time, we’ll look at the daily price chart for the US Dollar to Canadian Dollar Forex pair.

doji-pattern-trading-setup

In the lower left-hand corner of the price chart, we can observe that prices were rising, indicating an up-trending market condition. We can see a Double Doji pattern forming around the middle of the price chart, which is circled in green. This Double Doji pattern was highly distinct and would have alerted us to a possible trade setting utilizing the method. In contrast to the preceding example, this Double Doji pattern occurs near the apex of an upswing.

With these parameters satisfied, we can now proceed to plot our Double Doji pattern’s support and resistance lines. Take notice that the first Doji pattern creates the pattern’s high, while the second Doji pattern generates the pattern’s low inside this double Doji structure. As such, we will plot the resistance level using the first Doji high and the support level using the second Doji low.

Now we’ll place our OCO order, one above the high indicated by the upper black dashed line and one below the low indicated by the lower black dashed line. After that, we would proceed to wait for a price break above or below the resistance or support level before entering the trade.

In this example, the price breaks downward immediately after the double Doji formation. On the price chart, you can see that the sell entry was recognized. Now that we are in this position, we will ensure that we protect ourselves in the event of a bad price movement by entering a market stop-loss order. According to our strategy’s guidelines, the stop will be put right above the double Doji formation’s peak.

Our two-tiered exit approach asks for setting a target at a distance equal to the estimated length of the double Doji pattern below the breakout point. This will be our exit point for Exit 1. Take note of how two candles after the breakthrough, Exit 1 was hit, ensuring that we profited from this trade. However, just after reaching Exit 1, prices began to revert to the upside.

As a result, our goal 2 on this transaction was never realized. Bear in mind that target 2 is set to a length equal to double the length of the double Doji pattern. Rather than that, when the price reversed and began to move upward, our stop loss was triggered, forcing us to exit the trade. We ended up at breakeven in this trade since we were able to achieve Exit 1, but we lost those earnings when our stop loss was struck.

 

Conclusion

Candlestick analysis is essential to a large number of price action trading systems. A chart trader should be knowledgeable of a plethora of candlestick patterns. We’ve studied one of those critical candlestick patterns in this course — the Doji pattern. Additionally, as we discovered, the Doji pattern comes in a variety of variants.

Novice traders and market students should spend some time practicing and identifying this critical pattern since it appears frequently on the price chart. Knowing when and where the Doji pattern appears might provide traders with some insight into what is happening in the market.