Doji: Candlestick Charting

In candlestick charting, sometimes a candle forms with a very small body or no body at all, indicating the open and close were only pips apart during the time period in question. Called a doji (a term both plural and singular), this little candlestick signifies forex trading market indecision, but it must be viewed within the context of its surrounding candlesticks for its meaning to become clear.

Note that although the body defines a doji, the position and length of the wicks are most important in understanding the doji’s connotation within the market. The longer the wicks, the more pronounced the indecision.

A gravestone is a type of doji that looks like an upside-down letter T. The open, close, and low are all at or near the same price, but a high has been set somewhere above. The gravestone doji forms when bulls successfully push the price higher during the time period but cannot hold it at that level, and the resulting selloff lowers the price back down to its opening level.

The gravestone’s close cousins are the inverted hammer and shooting star. The inverted hammer has a red or black body and the shooting star a white one, but the bodies of both are longer than a true doji.

The formation of a gravestone during an uptrend indicates that buying pressure is waning and the bulls may be losing control of the rally. When one forms during a downtrend, it signifies that buying pressure is entering the market and the bears may be losing control. This mixture of buying and selling pressure, bulls and bears, could signal a trend reversal.

The opposite of a gravestone is the dragonfly doji, which looks like the letter T. The open, close, and high are all at or near the same price, but a low has been set somewhere below. The dragonfly doji forms when bears successfully drive the price lower during the time period but cannot maintain it at that level, and the resulting buying pressure drives the price higher.

Kin to the dragonfly are the hammer and hanging man, which have somewhat larger bodies. The hammer has a white body and the hanging man a red or black one.

The formation of a dragonfly doji during a downtrend indicates that selling pressure is waning and the bears may be losing control. Its formation during an uptrend indicates that selling pressure is entering the market and the bulls may be losing control. Again, a reversal may be in the works.

When any doji forms within a trend, it may indicate forex traders exiting part of their open positions and taking some profits off the table. In this instance, the uncertainty signified by the doji means the trend is pausing although not necessarily ending, as traders may re-enter the market on the dip and cause the trend to resume. However, they may also exit their positions entirely, causing a reversal.

All doji require confirmation from indicators and are not sufficiently strong signals in themselves for market entry or exit.