The doji candlestick
A candle where the open and close are almost identical, so the body is tiny, with shadows on both sides. It shows pure indecision: buyers and sellers balanced each other out over the day.
The doji isn't really a reversal formation, it's a picture of a standoff. What it means depends almost entirely on where it sits in the chart.
What it's about
The price moves up and down during the day but ends almost where it started. On the chart it appears as barely more than a cross or plus sign instead of a candle body.
How to recognise it
- The open and close sit very close together.
- The body is tiny or barely visible compared with the shadows.
- The length of the shadows can vary a lot, what matters is the missing body.
- After a strong trend it counts as a warning sign, in the middle of a quiet phase it means little.
What usually happens afterwards
A doji after a long trend shows the existing direction losing strength. Whether it turns into a reversal only shows in the candle afterwards. If that candle falls clearly in the opposite direction, many read it as confirmation.
Where it misleads you
Because the doji is so easy to spot, it's often overread. In most cases nothing much happens afterwards, the trend simply continues. Only combined with a strong prior trend and a clear confirming candle does it become useful.
An example trade with made up numbers
Months ago Lukas bought 60 shares at €25. The price rises to €50, forms a doji there and falls clearly to €46 the next day. Most people don't use a falling pattern for short selling at all. They take it as a reason to sell or protect an existing position. So does Lukas.
The decision: Lukas sells all 60 shares at €46.80. After a €1 fee and a little spread, Lukas locks in about €1,305 in profit.
If the pattern holds: The stock falls to €40 over the following weeks. Compared with holding on, Lukas avoided about €408 in lost value.
If it was a false breakout: The stock turns again and rises to €53. Lukas misses out on about €372 in extra profit.
Lukas didn't react to the doji on its own, only to the clearly falling candle afterwards. Without that confirmation he would simply have kept holding.
There are several doji variants: the long legged doji with long shadows on both sides, the dragonfly doji with almost no upper shadow, and the gravestone doji with almost no lower shadow. The last two resemble the hammer and the shooting star, just with an even smaller body.
According to Steve Nison, the longer and more pronounced the prior trend, the more weight a doji gets as a possible turning point.
Summary
- A doji has a tiny body because the open and close are almost equal.
- On its own it only shows indecision, not direction.
- Only after a strong trend and with a confirming candle does it become a useful signal.
Did you get it?
How do you recognise a doji?
The open and close sit almost level, the body is tiny, with shadows on both sides.
Is a doji on its own a buy or sell signal?
No, it only shows indecision and needs context plus a confirming candle.
What is the doji variant with almost no lower shadow called?
Dragonfly doji, it resembles the hammer.
Sources and further reading
- StockCharts ChartSchool, Doji. View source ↗
- Steve Nison: Japanese Candlestick Charting Techniques, 2nd edition 2001.
Related
- HammerCandlestick pattern
- Shooting starCandlestick pattern
- What chart patterns can doLesson