Japanese candlesticks are the basic building block of most technical analysis. That makes the ability to recognize different candlestick types a crucial trading skill.
First though, let’s start with a definition.
What Is a Doji Candlestick?
A doji is a candlestick without a real body. It indicates that the open and close prices are the same, regardless of the total trading range. Doji candlesticks are commonly seen during market indecision, reversals, trending moves, and volatile periods.
There are three sub-types of doji candlesticks—the dragonfly doji, the gravestone doji, and the long-legged doji.
Doji means “the same thing” in Japanese. This comes from the fact that the open and close are exactly the same. In trading terms, a doji candle signals indecision.
A doji candlestick paints a picture of a crossroads. Without a candle body, the trading range (wick-to-wick) usually stands out most. On the chart, it looks like a price action tug-o-war. Some doji do give a directional bias. However, most of them send the message that “it could go either way.”
Technically, doji should have the exact same opening and closing prices. In practical application though, “perfect” doji are comparatively rare. If the body is insignificant, you can treat it like a doji (though it may technically be a spinning top or similar). Regardless if the body is small or non-existent, the implications are generally the same.
As we’ll get into shortly, context is more important than exact criteria anyway.
More on how to trade doji candles in a moment.
First, let’s illustrate how they are formed.
How Are Doji Candles Formed?
Doji give the impression of back-and-forth price action.
That impression is generally correct.
Within the time period of the candle, price ended up exactly where it began. However, there is always more to the story.
A doji generally starts off by going one direction, then reverses to break through the open price, to then reverse again and close back at the open. It will often take various shapes before finally closing as a doji candlestick. You’d need shorter timeframes to see a more complete picture.
That’s also why you should usually wait for confirmation. It’s not officially a doji until the candle closes. And it can be dangerous to make trades based on incomplete candles.
You can never be 100% sure how a candlestick will look at the end of the time period.
That’s one of the reasons it’s so important not to get too focused on any single candle.
Where Doji Candlesticks Fit in the Chart Narrative
The markets are often characterized as a battle between the bulls and the bears.
Doji indicate that neither side was able to maintain control over the time period that candle represents. Obviously, no single candlestick can make or break an entire trend. Still, doji that appear at the right time can have significant implications on future price action.
Be on the lookout for them during:
- Indecision – When price can’t make up its mind which way to go, doji often set short-term support and/or resistance levels.
- Reversals – Doji are one of the most common types of candlesticks seen in and around reversal formations.
- Trending Moves – You may spot a few doji candles while price is taking a break before continuation of trend.
- Volatile Periods – Dramatic doji like dragonfly, gravestone, and long-legged tend to form when volatility is at its highest.
They may also appear in certain types of candlestick patterns.
To become a successful trader, understanding candlesticks is a great place to start. But you should also learn how candlestick patterns and chart patterns work. Plus, you need to be able to recognize cycles, trends, and price levels. From there, you can begin to read the story in the charts.
Tools like chart markup and trading indicators can reveal even more. And once you’ve chosen your asset(s) and trading style, the full chart narrative truly comes into focus. The charts will basically speak to you at this point.
By looking at the history of the chart, you can identify how price action played out around prior doji candles (or patterns that included them). Moreover, you can compare historical structures in price and your other tools to current price action.
Now, you’re actually doing real technical analysis.
How To Trade Doji Candles
You should never trade based on a single candlestick.
However, certain candle shapes may give you some trading ideas, especially given the right context. Doji candlesticks are one of those shapes.
In addition to the overall structure surrounding a doji, there are some other things worth paying attention to.
- Trading Volume – The greater the trading volume during any candlestick’s formation, the greater its potential implications on price action.
- Trading Range – The larger the distance from wick tip to wick tip, the more likely a doji is to signal changing market conditions.
- Price Formations – The open/close, high, or low of doji may help establish the strength or weakness of price levels and trend lines.
Generally, the fewer of these factors that are present, the less noteworthy the candle. Additionally, when looking at time periods where doji are common (ie. the 1-minute chart of a very stable asset), you should usually give their appearance less weight in your analysis.
In order to form a complete trading strategy, you need to understand the basic math of trading, order types, and trading psychology. Even more importantly, you need to develop your own edge and learn risk management. And if you really want to take it all the way, look into options and trading automation.
Before you get there though, there’s still more to learn about the candles themselves.
Other Types of Candlesticks
The doji candlestick is but one of many candlestick types.
You’d be wise to get familiar with all of the other ones too.
- Bearish Belt Hold
- Bullish Belt Hold
- Dragonfly Doji
- Gravestone Doji
- Hammer
- Hanging Man
- Inverted Hammer
- Long Candle
- Long-Legged Doji
- Marubozu
- Shooting Star
- Spinning Top
Not all candlesticks shapes earn names. So you should probably check out the ones that do. Just keep in mind that it’s not necessarily about memorizing all of the ins-and-outs of each. It’s more about ingraining the principles of price action into your brain.
In fact, you’re free to forget all of the names as long as you can look at a candlestick and understand what it means.
Takeaways
To review:
Doji candlesticks are a type of candlestick that signals uncertainty. They tend to show up during market indecision, reversals, trending moves, and periods of high volatility. That means they can help you find winning trades.
Of course, there are other types of candlesticks that you should learn about. And even so, candlestick analysis alone is not enough to trade successfully.
Nonetheless, you’ve now added one more tool to your toolkit.
Have questions or more information to add? Contribute to the conversation in the comments below! Or, if you know someone who could benefit from this post, share it with them. You can also check out our Japanese Candlesticks Guide to improve your candlestick analysis skills.