Doji, what does that mean? Yep that is what I said when I heard that word for the first time. But do not be afraid, it’s a kind of candlestick on a forex chart. For those of you hearing the word for the first time, I will need to explain a bit about what are candlesticks? So as not to get you confused.
What is a candlestick?
Candlesticks where first used in the 17th century in japan by a rice trader called Homma from the town of Sakat. They were used for tracking the price of rice and ever since then, they have become the most used charting system especially in the financial market.
Candlesticks are comprised of the high, low, open and close price for a given period.
- The high shows the highest point price reached for a certain period of time.
- The low shows the lowest point price reached for a certain period of time.
- The open denote the price which a financial instrument, commodity, currency, stocks etc. started to be traded for a period of time
- The close indicate the price which a financial instrument, commodity, currency, stocks etc. Stopped to be traded for a period of time.
Candlesticks may be in different period such as 1 minute, 1 hour, 1 day etc. it all depends on the trading strategy of the trader. For example I trade using the daily time frame.
Although we are not going into much details about candlesticks but note that they displays various colors depending on the pressure in the market for example a bullish (buy) candlestick maybe denoted by the color green and a bearish (sell) candlestick may be denoted with the color red. Different trading platform may have different ways to customize the colors according to user’s choice.
What are doji?
Doji are a kind of candlestick that is formed on the chart like a cross or a plus and and sometimes might look like an inverted cross. They are formed when there are indecisions between the buyer (bulls) and seller (bears). Unlike other candlesticks, the doji’s open and closing price are usually the same or may have a variation of few pips.
This is one of the reasons why traders consider it as a signal for reversal, though this may be true. It sometimes also indicates a continuation of a trend.
Long Legged Doji candle stick
The long legged doji candle stick has a much longer wick (a wick is the vertical line on a candlestick, the top of the line is the highest price while the bottom of the candle stick is the lowest price) this kind of doji, whens when there is a scheduled event that forces buyers and sellers to react but still shows indecision between both parties.
Dragonfly Doji candlestick
This is similar to the long legged doji candle stick except this one indicates the reversal of a trend when found at the top of a bullish trend or at the bottom of a bearish trend. It is more guaranteed of a reversal when found next to a Fibonacci retracement level or next to a support or resistance zone. The dragonfly doji may sometimes have a body that is close to the opening price and sometimes may be, but you can always identify it during trending markets due to it long wick.
Gravestone Doji candlestick
Funny name right, yes I know. The gravestone doji was named probably because it resembles a grave stone. Remember I said that “the dragon doji candlestick may sometimes have a body that is close to the opening price” this is the opposite of the gravestone doji candlestick. I have seen this happen numerous times in the market and this usually happens when an unexpected news comes out that forces market participants to buy a pair that’s not doing so well, during the market closing hours the bulls will sell off their positions causing the price to fall down, leaving a spike on the wick and the closing price usually are the same with the lowest price for that day.
Though there are other types of doji candlestick, I will discussed them in my other articles but I sincerely believe these are the one every trader need to keep any eye out for while trading.
There are lots of combination of candle stick formation to spot reversal and trend continuation but there are very cumbersome to memorize and implement. I will advise every forex trader out there to keep their trading strategy and trading plan simple.
ALSO READ: How money is made trading the forex market
I would love to hear your opinion, please do comment below and the picture below is the combination of all the doji candle stick discussed in this article.