Understanding Candlestick Formation – Part 3: DOJI & LONG-LEGGED DOJI

Apart from the major candlestick formation discussed in Part 1 & Part 2, there is one more candlestick formation that is important in candlestick chart analysis: “Doji”.

The following are some forms of Doji candlestick:



1) Doji
Basically, Doji is formed when the opening and closing prices are virtually equal. (The open and close ideally should be equal, but not necessarily). The length of the upper and lower shadows can vary. Hence, some doji can look like plus sign, a cross, or inverted cross.

Doji represents indecision or tug-of-war between buyers and sellers. The stock was trading higher and lower than the opening level during the session, but closed at or very near to the opening. That means neither buyers nor sellers could gain control, signaling indecision and that a turning point from the existing trend could be nearing.

Doji by itself is a neutral pattern. Doji could provide a reversal signal in relation to the preceding trend and future price confirmation.
Hence, when a doji forms on the chart, pay attention to the preceding candlesticks / trend:

When a doji appears after an uptrend (e.g. a series of candlesticks with long white bodies) or when a doji forms at the resistance, it signals that the buying pressure is starting to diminish, and the uptrend could be nearing to an end. Because in order for price to continue rising, more buyers are needed. The appearance of doji in this case implies the lack of new buyers. Even after the doji forms, further downside is required for bearish confirmation.

In contrast, when a doji appears after a downtrend (e.g. a series of candlesticks with long red/black bodies) or when a doji forms at the support, it signals that selling pressure is starting to weaken, and the downtrend could be nearing to an end. Even after the doji forms, further upside is required for bullish confirmation.

However, if many dojis are observed in a chart, the appearance of a new doji will not carry too much weight in signaling a reversal.

2) Long-Legged Doji
Long-legged doji have long upper and lower shadows that are almost equal in length.
These doji indicate that prices moved considerably above and below the open during the session, but closed at or very near to the opening price, reflecting a great amount of indecision in the market and that a change of trend could be nearing.
Similarly, this kind of dojis also may signal a reversal depending upon the preceding trend and further price confirmation, as discussed above.

Continue to Part 4.

Related Posts:
* Learning / Understanding Candlestick Charts
* Learning Charts Patterns