What is a Doji?
Doji is a candle formation which occurs when the opening and closing price of the stock is the same or nearly the same. See examples below
Why is the Doji an important candle formation?
Doji are important because they are indicator of market indecision. Buyers and Sellers end up at the same price after trading. With this concept Doji becomes a turning point in the stock's trend.
The usual assumption is that when a Doji is formed at the bottom of the stock meaning when the stocks trend is downward and a Doji is formed at the end it could mean a reversal which in this case is an upward. A Doji at the top or peak of the trend might also indicate a reversal but this time it is a downward trend.
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| source:http://stocata.org/ |
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| source: http://stocata.org/ |
A doji with long wick or shadows and the opening and closing is in the middle is also called Rickshaw man.
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This is the doji that clearly signify indecision. Trading range is wide as indicated by the long wick or tail. The stock opened at the middle and close at the middle meaning neither buyer or seller is willing to advance or lower price thus ending in the same price.
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| http://www.forexbrace.com
Gravestone doji as it says is the bearish doji. This doji signify that sellers who wanted to sell their holdings tried to trade at a high thus forming a long wick but in the end price is pulled down by buyers but never below the opening price.
A dragonfly doji is the reverse of the gravestone. The scenario is that buyers drove the price down but sellers fought back thus push back the price up but only up to the extent of the opening.
With these general doji types one should also make sure that such formation must be confirmed by either the previous candles and volume. As I mentioned the general assumption is that a doji found at the bottom indicates an upward reversal while if found at top a downward reversal. Also doji form patterns with other candles. These combination of candle formations make a pattern and may indicate a bullish or bearish trend.
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