The Doji is is a powerful candlestick formation often found at the bottom and top of trends and it is usually considered as a sign of possible reversal of price direction. The Doji signifies indecision between bulls and bears and it is characterized with the equal opening and closing prices. The Doji is an important pattern followed in both Managed Forex Accounts, Forex Trading Signals, and it is among subjects discussed in the Training Course.
A Doji is not as significant if the market is not clearly trending, as non-trending prices are inherently indicative of indecision. For example, if it is formed in an uptrend or downtrend, this is normally seen as significant since it is a signal that the buyers are losing dominance when found in an uptrend and vice versa, it is a signal that sellers are losing dominance if found in a downtrend.
The creation of the Doji pattern illustrates why the it represents such indecision. After the open, bulls push the price higher only to be rejected and pushed back lower by the bears. However, bears are unable to keep prices lower, and bulls then push prices back to the opening price. In general, Dojis are neutral patterns.
It is important to emphasize that the Doji pattern does not mean a reversal, it means indecision. A Doji can be viewed as a reversal signal only when it appears at the top or bottom of a price move. Just like other technical indicators and chart patterns, the Doji requires confirmation to confirm a reversal.
Types of Dojis:
Neutral: Dojis formed when the opening and closing prices are virtually equal.
Long-Legged: This Doji reflects a great amount of indecision about the future direction of the underlying asset.
Dragonfly: The long lower shadow suggests that the direction of the trend may be nearing a major turning point and it could be interpreted the same way as the Hammer or the Hanging Man candlestick. It is formed when the opening and closing price of the underlying asset are equal and at the high of the day.
Gravestone: The long upper shadow suggests that the direction of the trend may be nearing a major turning point, and it could be interpreted the same way as the Shooting Star or the Inverted Hammer candlestick. It is formed when the opening and closing price of the underlying asset are equal and occur at the low of the day.