A doji is a traditional chart pattern which looks like a cross or plus sign and occurs when a candle’s open and close price are very close or equal. Doji candles are interpreted to signify indecision in the market.
Meaning “blunder” in Japanese, the term doji was first used by Japanese commodity traders to describe the uncommon occurrence of a candle with exactly the same open and close. Originating in Japan, conventional candlestick charting was invented by legendary Japanese rice futures trader Homma Muneisha.
Doji candles are indeed rare and are often considered significant by technical analysis traders. Although in a non-trending market, a doji might not have much meaning, the appearance of a doji candle in a trending market can be a significant event, chiefly for the purpose of identifying trend reversals.
Primarily used in daily charts, doji bars can be spotted in any chart interval and across all timeframes.
Types of Doji
For all doji candles, the opening and closing prices are virtually equal. However, small subtleties make for 4 distinct types of doji.
- Neutral Doji: This is the standard form of the doji candle, when the open/close price falls in the middle of the high & low prices for the selected timeframe. Outside of a trending market, dojis are often considered neutral patterns by technical analysts.
- Long-Legged Doji: An extended version of the Neutral Doji, the Long-Legged Doji signifies an increased amount of indecision regarding the market’s future price.
- Gravestone Doji: When the open and close of a bar fall at or very close to the low of the bar, this is referred to as a Gravestone Doji. A Gravestone Doji can sometimes indicate a bullish reversal from a downtrend.
- Dragonfly Doji: The opposite of a Gravestone Doji, when the open & close of a bar occur at or towards the high of a bar, this is called a Dragonfly Doji. Traders look for Dragonfly Dojis to help determine the peak of an uptrend and spot bearish reversals.
Use Hollow Candles to Quickly Identify Doji Candles
NinjaTrader’s Hollow Candlestick bar type assigns a separate color to doji candles for easy identification. In the chart below, notice the white doji candle in the Crude Oil futures (CL) market following a trending market. In the candles following, an emerging downtrend can be seen.
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