The first step toward becoming a professional technical trader, irrespective of market (cryptocurrency, forex, traditional etc), is to understand price action through Candlestick Analysis. In particular, the various types of Doji Candlestick. Knowing this would give you an edge on forecasting market reversals and market sentiment like a professional. Additionally, it will keep you on the right side of the market - the profitable side!
Candlestick Analysis - A Beginners summary
To better grasp the different types of candlesticks, like the doji candlestick, let’s start with the basics:
The Anatomy of a Candlestick - A candlestick has 4 components (refer to Image - Candlestick Components - assume its a 1D candlestick):
- The Open: The price at which a crypto/stock starts the day at
- The Close: The price at which a crypto/stock ends the day at
- The High: The highest price a crypto/stock hits during that day
- The Low: The lowest price a crypto/stock his during that day
The Open and Close make up the thick part of the candlestick, known as the Body. Whereas the High and Low make up the thin parts, known as the Shadows (some call it the Wick). Together they form a candlestick.
Each candlestick plays out over a specific time span, depending on what timeframe you’re looking at. Example: A candlestick on the daily chart is the open, close, high and low within the last 24hours. I.e each candlestick represents ALL the price action that took place during a 1 Day time span.
TradingView Tip: If you're wondering what time each candlestick begins, simply hover your mouse on the candle, and look out for the timestamp on your x-axis.
What is a DOJI Candlestick?
In a “Doji Candlestick”, the Open and Close price are the same (refer to image "Doji Candlestick"). If the difference in the Open and Close price are within a few ticks of each other, the candle may still be identified as a Doji.
Logically, the doji candlestick is viewed as a tie between the bulls and bears. It's a representation of uncertainty and indecision. Hence, when a doji candlestick is printed in the middle of rally (or dump), it could signify a potential trend reversal.
Remember, price rallies and dumps need conviction to continue, and a doji candlestick is counterintuitive to that.
4 Types Of Doji Candlesticks
There are 4 types of doji candlesticks. All of which have bullish or bearish implications. This depends on whether the doji is found in an uptrend, or downtrend.
The 4 types of Doji's are as follows:
- The Common Doji – A Neutral Candle suggesting a tie between bulls and bears ( image 'Doji candlestick')
- The Gravestone Doji – A Bearish Doji Candlestick. A good reversal indicator in an overextended uptrend
- The Dragonfly Doji – A Bullish Doji Candlestick. A good reversal indicator in an over-sold Bear dump/downtrend.
- Long Legged Doji - A Bullish or Bearish Doji Candlestick, depending on whether its found in an uptrend or downtrend.
Note that doji candlesticks are commonly observed as Reversal Candles when found on over extended bull rally, or an oversold downtrend.
Why are Doji's known as Reversal Candles?
Doji candles signify tired trends when found in the middle of an uptrend or downtrend. As mentioned above, rallies and dumps need conviction to continue, and a doji candlestick is counterintuitive to that. They represent a tie between bulls and bears.
However, a tie (doji) doesn't necessarily have to imply a reversal. It could also imply a short pause in the underlying trend, or a 'soon approaching' reversal. This is where the trader heeds caution, and looks for follow-up price action to come up with an informed hypothesis.
Usually, doji's make for good reversal indicators when found on overextended rallies, or oversold dumps. When found in the early stages of a trend, the doji candlestick is unlikely to mark a reversal.
A good example of a Bearish Reversal Doji was in BTC's overextended Bull Rally. A Bearish doji candlestick was spotted on the Daily BTC/USD chart on Dec 18th, 2017 (refer to image below). This was during BTC's mega bull rally to $20K back in 2017
Identifying Candlestick Patterns
Each candlestick, including a doji candlestick, is akin to one piece of a puzzle. It’s only a hint at the bigger picture. To get a better idea of the picture, you’ll need to analyze several candlesticks together. You need to identify a candlestick pattern.
While there are such things as Bullish candlesticks, Bearish candlesticks, Reversal candles etc. Identifying these candles are of no significance without any context.
The context comes from recent price action around such candles. For example, "was there a preceding rally or dump?" and "was it over extended?". Such pieces of information are only derived from analyzing a set of candlesticks together - Analyzing a Candlestick Pattern for bullish or bearish signals.
Identifying a doji candlestick within a candlestick pattern can help solidify price forecast tremendously, and keep you prepared for any adverse price moves in the market.
For the sake of brevity, we'll discuss the various types of Bullish and Bearish Candlestick patterns, as well as various Bullish and Bearish Doji Candlestick in upcoming posts.
Pieces Of The Candlestick Puzzle
Candlestick analysis is like solving a puzzle. Identifying a Doji candlestick is like finding a piece of the puzzle that grows more pivotal to the whole picture, the more puzzles you add to it. A Candlestick Pattern is akin to solving a third of the puzzle and getting a good idea of what the end picture holds.