How to Trade the Doji Candlestick Pattern
DOJI CANDLESTICK TRADING: MAIN TALKING POINTS
The Doji candlestick, also known as the Doji star, is a special candle that indicates hesitation in the foreign exchange market. Neither the bulls nor the bears have the upper hand. However, there are five different varieties of the Doji candlestick, and not all of them signal hesitation. As a result, it is critical to understand how these candles are formed and what this may signify for future price fluctuations in the foreign exchange market.
Doji candlesticks are explained in detail in this article, which also covers the five various forms of Doji that may be employed in forex trading. It will also explore the most effective trading methods that make use of the Doji candlestick.
WHAT IS A DOJI CANDLESTICK AND HOW DOES IT WORK?
The 'cross' form of the Doji candlestick, also known as the Doji star, distinguishes it from other candles. This occurs when a forex pair opens and closes at the same level, resulting in a short or non-existent body, as well as upper and lower wicks that are both of similar length, respectively. In general, the Doji symbol signifies hesitation in the market, but it may also be an indicator of a trend's momentum slowing down.
ADVANTAGES OF USING THE DOJI CANDLESTICK IN TECHNICAL ANALYSIS
In forex trading, the Doji star may be quite useful since it offers an opportunity to take a "stop and reflect." Alternatively, if the market is heading higher at the time the Doji pattern occurs, this might be seen as an indicator that purchasing momentum is slowing down or that selling momentum is about to ramp up. Traders may see this as a signal to close out an existing long position.
However, it is critical to evaluate this candle formation in combination with a technical indication or with your specific exit plan in order to be successful. The only way to get out of such deals is if the trader is certain that the indicator or exit plan verifies what the Doji is indicating, which is rare.
Please keep in mind that it is conceivable that the market remained uncertain for a little length of time before continuing to grow in line with the trend. As a result, it is critical to perform extensive research before departing an employment.
UNDERSTANDING DOJI CANDLESTICK VARIATIONS
Aside from the Doji candlestick that was previously mentioned, there are four more versions of the Doji pattern. Whereas the basic Doji star signifies indecisiveness, various forms of the symbol may tell a different tale and, as a result, will have an influence on the trading strategy and choices made by investors.
Aside from that, it is quite unusual that the perfect Doji would appear in the FX market. In actuality, traders search for candles that are as similar to the patterns shown below as possible, and more often than not, these candles will have a very small body. The following is a list of the several types of Doji candlesticks. If you want a more in-depth explanation, check out our guide on the Different Types of Doji Candlesticks.
HOW TO TRADE THE DOJI CANDLESTICK
It is possible to trade the different Doji candlestick patterns in a variety of ways. However, in order to execute better probability trades, traders should constantly search for signs that complement what the Doji candlestick is stating. Additionally, while trading the Doji, it is critical to practice effective risk management in order to minimize losses in the event that the transaction does not work out as planned.
We will look at numerous Doji Candlestick methods that may be used in trading in the section below.
1) Trading with the Doji star pattern
The Doji star appears near the bottom of an existing downtrend on the GBP/USD chart, as seen in the chart below. The Doji pattern indicates that neither buyers nor sellers are in command of the situation, and that the trend may be about to turn. It is critical to highlight at this time that traders should seek for supporting signs that the trend may be reversing before completing a transaction to avoid losing money. The stochastic oscillator is used in the chart below, which indicates that the market is now in overbought zone, further supporting the bullish bias in the market.
2) Using the Dragonfly Doji in Trend Trading
A typical Doji candlestick trading method is to seek for Dojis that emerge around levels of support or resistance in order to profit from them. The Dragonfly Doji, which appears near trendline support, is highlighted in the chart below. In this circumstance, the Doji does not occur at the peak of the uptrend, as previously said, but traders may still trade based on the information provided by the candlestick about the market.
The Dragonfly Doji indicates that lower prices have been rejected, and the market then climbed higher and closed around the starting price. Additionally, the fact that the candle looks to be around trendline support and that prices have previously rebounded off of this major trendline lends credence to the possibility of a bullish bias.
3) Double Doji Strategy
One Doji is typically a decent signal of uncertainty; however, two Dojis (one after the other) is an even stronger indication of indecision and is frequently followed by a significant breakout. In order to take advantage of the powerful directional move that emerges following a period of hesitation, the Double Doji method is used on the chart.
Traders might sit and wait for the market to go higher or down immediately after the Double Doji pattern. In the GBP/ZAR chart below, the entry point may be put below the low of the two Dojis, and the stop can be placed above the highs of the two Dojis, depending on the situation.
In the case of breakouts with increasing momentum, targets should be set at the most recent level of support; however, a trailing stop should be considered in the case of breakouts with little or no momentum.
