Why You Shouldn't Ignore the Doji
One of the most overlooked candlestick formations is without a doubt the doji. The main reason for this is that it often is thought of as having very little to say, and isn’t a signal much of the time. However, if the market produces one at the right spot – they can be strong signals in their own right.
The doji itself is a candle that ends up fairly unchanged. The market will go back and forth in a range, but close the period of time either exactly where it started, or very close to that level. The range extends on both sides, both up and down, of the entry and closing prices.
As you can see from the picture above, the session that the candle represents had plenty of movement with both bulls and bears moving the markets. However, at the end of the session, little had changed. While this kind of candle doesn’t show much at the moment, it is the next move that becomes important. If you think about it, the reading of a doji is simple common sense.
The breaking of either the top or bottom of the candle signals that one of the competing sides has “lost” the battle. For example, once the doji above was printed, we had established that there was a lot of interest in the market at that level. Both the sellers and buyers have shown a desire to move the market, and once the range is broken – one of those groups is now losing money. This is important information as that group will also have to cover their positions, which in turn only accelerates the move going forward. After all, if the sellers have lost the battle, they will want to turn around and buy back the position in order to minimize losses, which in turn will push prices even higher.
As in all things technical analysis related, the doji is more important on the higher time frames. It takes much more information and many more trades to form a weekly candle than a 15 minute one, and as such a doji being printed in the weekly timeframe would naturally represent a bigger struggle in the market.
Also, it should be noted that the most reliable dojis appear at support and resistance areas. If there is obvious support under a doji that breaks to the upside, this not only shoes a breaking of the seller’s positions, but also the fact that the overall market is supportive underneath. When combined, these two factors can make a great trading signal.