Doji Candlestick Pattern: Definition, Formation, Types, Trading, and Examples

The Doji candlestick pattern is a distinctive formation on the price chart that signals a standoff between buyers and sellers, leading to a close where prices finish at or near the opening level. These patterns are easily recognized by their resemblance to a plus sign or a cross, reflecting an equilibrium in market sentiment.

There are six main variants of the Doji pattern, each with its implications:

  • The Gravestone Doji, suggests rejection of higher prices due to its closing price being near the low of the session.
  • The Long-Legged Doji indicates substantial indecision as prices fluctuate significantly during the session.
  • The Dragonfly Doji hinted at a dismissal of lower prices with its closing price near the session’s high.
  • The Standard Doji represents a balanced tug-of-war between buyers and sellers.
  • The 4-Price Doji shows an extreme level of indecision with all prices being identical.
  • The Neutral Doji generally signifies a continuation of the current trend.

Traders interpret these patterns by considering the context in which the Doji appears. A Doji could signal market indecision, suggest the current trend might persist, or foreshadow a potential reversal. Tactical responses to a Doji include the use of stop-loss orders to limit potential losses or initiating short positions in anticipation of a downturn.

The advantages of incorporating Doji patterns into trading strategies are multifold. They serve as a guide to potential trend reversals and are easy to spot across various timeframes due to their distinct appearance. Additionally, their presence on a chart can enhance the accuracy of forecasting future price movements.

However, traders must exercise caution. Doji patterns can sometimes lead to false signals, requiring a waiting period for confirmation of the upcoming market trend. It’s this delay in confirmation that presents a risk of missing timely trade entries or exits.

In the broader landscape of candlestick patterns, the Doji is a fundamental element, providing critical insights into market dynamics. Its role is vital in the toolkit of traders aiming to navigate the complexities of market trends and movements.

What exactly is a Doji Candlestick?

A Doji candlestick is a unique pattern observed in candlestick price charts, characterized by its opening and closing prices being nearly identical or showing minimal variation. This pattern gets its name from the Japanese term ‘doji,’ signifying an anomaly or a rare occurrence where security opens and closes at almost the same price level. Typically, Doji candlesticks are regarded as neutral markers, highlighting the prevalent indecision within the market.

How does a Doji Look Like

The Doji pattern resembles a cross or a plus sign. The structure of the Doji is defined by its horizontal and vertical lines, which vary in length based on the day’s opening, high, low, and closing prices. At the top of the vertical line, you find the highest price of the security for that day, while the bottom indicates the lowest price. The horizontal line of the pattern represents the near-equal opening and closing prices on either side.

Doji patterns are primarily interpreted as indicators of market indecision. Traders often read these patterns as signs of a balanced struggle between buyers and sellers, with neither side gaining a significant upper hand. However, some investors and traders also view Doji patterns as potential signals for upcoming trend reversals or the likelihood of the current trend continuing. The interpretation largely depends on the context in which the Doji appears, such as its placement relative to previous patterns and the overall market trend.

How is a Doji Candlestick Pattern Formed?

The doji candlestick pattern forms when a security’s opening price equals or is very close to its closing price. This pattern emerges as the security’s price initially rises following the opening, pushed up by bulls, but then gets pulled down by bears. Although the bears bring the price to a low, the bulls regain control and push it higher.

How a Doji Formed

Due to this tug-of-war between bulls and bears, the closing price ultimately matches or closely aligns with the opening price. A doji candlestick has a distinctive shape resembling a plus sign or cross. Traders and investors analyze price movements based on the appearance of this cross-shaped doji candlestick.

The doji candlestick comes in three variations, each with its color based on opening and closing prices. The green doji has a slightly higher closing price than the opening price. Conversely, the red doji has a closing price slightly lower than the opening price. The third type has no real body and appears as a single black line, indicating equal opening and closing prices.

Doji candlesticks, whether red or green, are often found at the peaks and troughs of trends, suggesting potential trend reversals. However, they can also indicate indecision or the continuation of the current trend. The image below illustrates the three types of doji patterns and their colors, representing different price scenarios.

What does Red Doji mean?

A red doji serves as an indicator that the closing price of the security is slightly lower than its opening price, reflecting a minimal difference between the two. In the visual representation, you can observe that the opening price is just slightly higher than the closing price, with both values positioned very close together. The red color of the doji candlestick is a result of this slender difference between the opening and closing prices.

What does Red Doji mean

The small red body of the doji highlights the minute gap between the opening and closing prices. Despite being indicative of a potential reversal or indecision in the market, the red doji emphasizes the subtle variations in pricing that investors closely monitor to make informed decisions about the security’s future movements.

What does Green Doji indicate?

A green doji signifies that the closing price of the security is marginally higher than its opening price, with a minimal difference between the two. As depicted in the image, the opening price is slightly lower than the closing price, yet both values are nearby.

What does Green Doji indicate

The slender green body of the doji candlestick reflects the minute gap between the opening and closing prices. Despite indicating a potential reversal or market indecision, the green doji emphasizes the subtle pricing nuances that investors closely observe to make informed decisions about the security’s future direction.

Does It Matter if A Doji Is Red or Green?

No, whether a doji is red or green does not matter because the opening and closing prices have an extremely tiny difference. The minimal gap results in both red and green doji candlesticks having very thin real bodies, making their interpretation and analysis nearly identical.

What are the Types of Doji Candlestick Patterns?

The six main types of doji candlestick patterns are listed below. 

1-Gravestone Doji

A gravestone doji is a bearish doji candlestick pattern where the opening, lowest, and closing prices are very close, and the highest price is far away. It signifies bearish dominance and has a long upper shadow. The horizontal line in the gravestone doji is positioned towards the bottom of the vertical line.

Gravestone Doji

In the image, the gravestone doji has its open, close, and low prices close, with the high price at the tip of a long upper shadow. This shadow represents early strong buyer positions turning into losses by the end of the day. The gravestone doji is identified by its shape with a long upper shadow and a small or absent lower shadow.

Investors use gravestone doji as a signal for an upcoming bearish trend reversal, often occurring at the end of an uptrend. In the image, the gravestone doji appears at the uptrend’s end, and its distinctive features include a long upper shadow and almost no lower shadow. This pattern suggests a shift to a bearish trend, evident as prices decline after the gravestone doji.

2. Dragonfly Doji

The Dragonfly Doji is a bullish candlestick pattern where the open, high, and close prices are close, and the low prices are far away. It signifies bullish dominance and has a long lower shadow, opposite to the gravestone doji. The horizontal line in Dragonfly Doji is positioned at the very top of the vertical line.

Dragonfly Doji

In the image, the dragonfly doji has its open, close, and low prices close at the top of the candlestick, with the low price at the tip of a long lower shadow. This shadow represents buyers dominating sellers, pushing the price higher throughout the day. A dragonfly doji is identified by its shape with a long lower shadow and a small or almost absent upper shadow.

Investors use the dragonfly doji as a signal for an upcoming bullish trend reversal, often occurring at the end of a downtrend. The long lower shadow indicates high demand and the inability of bears to drag the price down. Dragonfly doji patterns are seen as a sign of a potential bullish trend, and an example is depicted in the price chart below.

3. Long-legged Doji

The Long-Legged Doji is a candlestick pattern with long upper and lower shadows, and the open and close prices are approximately close. It suggests indecision in the market, with neither bulls nor bears in control. This doji pattern represents uncertainty about upcoming price movements, where demand and supply are in equilibrium.

Long legged Doji

Investors use the Long-Legged Doji as a signal of uncertainty, especially during a strong bullish, or bearish trend. The pattern indicates a balance between supply and demand, potentially signaling a trend reversal. In the example below, the Long-Legged Doji appears at the end of a bullish trend, predicting a subsequent bearish reversal.

4. Standard Doji

A Standard Doji is a pattern that, on its own, doesn’t indicate anything specific. It’s interpreted based on the patterns preceding and following it. Resembling a plus or cross sign, the Standard Doji has upper and lower shadows of varying lengths, determined by the day’s high and low prices.

Standard Doji

In the image, the Standard Doji’s shape is like a plus or cross symbol, with shadow lengths reflecting the security’s high and low prices. Its interpretation depends on patterns before and after it. Investors use Standard Doji in technical analysis along with other indicators to anticipate trends. In the example below, a Standard Doji appears at the end of an uptrend, signaling a potential bearish reversal in the subsequent downtrend.

5-Price Doji 

A 4-Price Doji is a pattern where the open, high, low, and close prices are all the same. It’s represented by a simple horizontal line, indicating no price change for the day. This pattern signals indecision or a quiet market. In the image, the 4-Price Doji is evident as a flat line, with all prices aligning.

4-Price Doji

The unique feature of 4-Price Dojis is the absence of a vertical line. They are easily recognizable by their straightforward horizontal shape. Traders interpret this pattern as a sign of uncertainty and typically wait for subsequent patterns before making trading decisions. In the example below, two 4-Price Dojis appear at the end of a downtrend, indicating market uncertainty before the subsequent price increase.

6-Neutral Doji

A Neutral Doji is a pattern where the opening and closing prices are identical, creating a wide gap between the high and low prices. The upper and lower shadows of a Neutral Doji are equal in length, reflecting a standoff between bulls and bears. While Neutral Dojis may signal trend reversals, it’s not a consistent feature. In the image, the Neutral Doji is evident, showing a lack of real body, equal-length shadows, and high indecision.

Neutral Doji

Unlike other doji patterns, Neutral Dojis have widespread shadows. They can appear in various market trends, and their analysis depends on the context. At the end of a downtrend, a Neutral Doji suggests a potential reversal, while at the end of an uptrend, it signals a potential bearish reversal.

In the example below, two scenarios show Neutral Dojis forming. In the first, it appears amidst a downtrend, indicating a pause in the trend. Afterward, the downtrend continues. In the second case, the Neutral Doji reflects indecision, with neither bulls nor bears dominating.

When does the Doji Candlestick Pattern happen?

The Doji candlestick pattern occurs when a security’s open and close prices are nearly identical or very close. It happens during a struggle between bulls and bears, where neither side dominates. Bulls aim to push prices higher, while bears try to pull them lower. This tug-of-war results in the security closing very close to or at the open. Doji candlesticks are rare occurrences.

How often does the Doji Candlestick Pattern occur?

Doji candlestick patterns are uncommon, rarely appearing in market charts. Traders spot them before reversals or during periods of market indecision. Investors often combine Doji patterns with other indicators for trend confirmation.

How to read Doji Candlestick Pattern in Technical Analysis?

Reading doji candlestick patterns in the technical analysis involves three key steps. First, identify the doji pattern on the price chart. Doji patterns typically resemble a plus or cross sign, with variations based on the specific type of doji. For instance, a gravestone doji signals a potential bullish trend reversal, while a dragonfly suggests a possible bullish trend reversal and a 4-price doji indicates indecision.

Second, analyze the context in which doji candlesticks appear. Doji candlesticks at the end of uptrends may signal bearish reversals, while those at the end of downtrends may indicate bullish reversals. Patterns like the 4-price doji or neutral doji are often seen as signs of indecision.

Third, confirm the analysis by studying the patterns that follow the Doji. In the confirmation step, observe the subsequent candlesticks to validate the trend. For instance, if a dragonfly doji appears at the end of a downtrend, confirming candlesticks showing an uptrend strengthens the bullish reversal signal.

The image illustrates these steps, emphasizing the importance of confirmation and using doji patterns in conjunction with other technical indicators for accurate results in market analysis.

How accurate is the Doji Candlestick Pattern in Technical Analysis?

Doji candlestick patterns are reliable when used with other technical indicators, offering accurate predictions. However, in isolation, Doji patterns, occurring rarely, provide limited information about price reversals. They often signal market indecision, making standalone use less reliable.

When is the best time to Trade using the Doji Candlestick Pattern?

Trade using a doji pattern is best when three consecutive doji candlesticks form, creating a tri-star pattern. This signals a strong potential for trend reversal, especially at the end of a prolonged bullish or bearish period. Two consecutive doji are also good signals for trend reversals, though not as robust as the tri-star pattern.

What Does 2 Doji in A Row Mean?

Two consecutive doji candlesticks, known as “2 doji in a row,” signal strong market indecision, suggesting a potential breakout and trend reversal. This pattern forms when consecutive doji candles show no variation between the open and close prices, indicating equal demand and supply. The appearance of 2 doji in a row is a significant indicator of upcoming trend reversal, making it an opportune time to plan trading strategies.

What does 3 Dojis Candlestick Pattern in a row mean?

A 3-Doji candlestick pattern in a row means that powerful indecision is prevalent in the market. The 3 Doji candlestick pattern signals a very high possibility of an upcoming bullish or bearish trend reversal. A 3 doji pattern is formed when three doji candlestick patterns appear consecutively. The 3 doji pattern is formed as a result of a very strong sentiment of indecision prevalent in the market which prevents any fluctuation between the open and close price. The appearance of a 3 doji in a row pattern, like the 2 doji pattern is considered a very good time to apply trading strategies, albeit a stronger indicator than the 2 doji pattern.

How to Trade with the Doji Candlestick Pattern in the Stock Market?

  1. Spot the Doji Pattern: Identify a doji on the stock price chart where open and close prices close or coincide. Doji has almost no real body, with varying upper and lower shadows depending on the type.
  2. Confirm with Indicators: Confirm doji signals using other technical indicators to strengthen predictions. Use tools like stochastic indicators to validate doji signals and avoid false predictions.
  3. Apply Trading Strategies: Apply trading strategies based on predicted trends. Hold or buy more securities for a bullish reversal, and consider shorting for a bearish reversal. Implement stop-loss orders for risk management.

What is an example of a Doji Candlestick Pattern used in Trading?

The price chart below illustrates how a doji candlestick pattern is utilized in trading.

What is an example of a Doji Candlestick Pattern used in Trading?

In this instance, the initial uptrend is followed by a doji, indicating market indecision with open and close prices matching. Subsequent patterns confirm an impending price reversal, as shown by the following price decline. Traders confirm predictions using indicators like stochastic or RSI before implementing strategies. If predicting a bearish reversal, strategies such as shorting can be applied, with a stop-loss order just above the upper shadow for risk management and profit optimization.

Is the Doji Candlestick Pattern profitable?

Yes, the Doji candlestick pattern can be profitable when combined with complementary technical indicators. However, relying solely on the doji pattern in isolation is not very reliable due to its infrequent occurrence.

Is a Doji Candlestick Pattern a Bullish Reversal?

No, a doji candlestick does not always indicate a bullish reversal. A doji candlestick can indicate a bearish or bullish reversal indecision or pause in the trend. What a doji candlestick indicates depends on the type of doji pattern that is present as well as the context in which it presents itself. 

What are the advantages of a Doji Candlestick?

Doji patterns offer several advantages to investors and traders:

  1. Guidance through Trend Reversals: Doji candlesticks excel in guiding investors through potential trend reversals. They provide insights into upcoming bullish or bearish reversals based on the specific type of doji pattern observed. This information allows investors to plan their trading strategies accordingly.
  2. Ease of Identification: A key advantage of doji patterns is their simplicity in identification. Their distinctive shapes, resembling variations of the plus or cross symbol, make them easily recognizable on price charts. Even beginners can spot these patterns with their minimal real bodies and varying lengths of lower and upper shadows.
  3. Accuracy in Predictions: Doji patterns are known for their reliability and accuracy in predicting impending price reversals. Investors can enhance the credibility of doji predictions by incorporating other technical indicators, thereby minimizing potential losses.
  4. Versatility Across Timeframes: The flexibility of doji patterns extends to various timeframes, from shorter ones like the one-hour chart to longer timeframes. This adaptability makes doji candlesticks effective tools for traders operating in different time intervals.

Additional advantages include the ability of doji candlestick patterns to highlight trend highs and market uncertainty. Their effectiveness is not limited to specific markets, as they work well in both stock and forex markets.

What are the disadvantages of a Doji Candlestick?

Doji candlesticks come with a couple of drawbacks:

  1. Tendency for False Positives: The main drawback of doji candlesticks is their inclination to produce false positives. Not every doji signals a definite trend reversal; it can also indicate a temporary pause in the trend or market indecision. To mitigate this risk, investors often combine doji patterns with other technical indicators for more reliable signals.
  2. Waiting Period for Trend Confirmation: Another drawback of using doji patterns is the necessity to wait for confirmation of the upcoming market trend. Investors are advised to exercise patience and await the emergence of subsequent patterns after a doji to validate the trend indicated by the Doji candlestick.

Additional disadvantages include the need to identify the specific type of doji before interpreting its signals, which may pose challenges due to the six different types. Doji candlesticks may not be as effective in shorter timeframes. Moreover, their rarity reduces their overall reliability.

What are other Types of Candlestick besides Doji?

There are more than 40 Types of candlesticks classified into three categories: bullish, bearish, and continuation patterns.

The first category, bullish candlestick patterns, indicates bullish trend reversals. Examples include the hammer, piercing pattern, bullish harami, morning star, inverted hammer, and tweezer bottom.

The second category, bearish candlestick patterns, signals bearish trend reversals. Examples are the hanging man, dark cloud cover, shooting star, evening star, bearish harami, and tweezer top.

The third category, continuation candlestick patterns, signifies ongoing trends. Examples include doji, spinning top, high wave, falling window, rising three methods, falling three methods, etc. Doji candlesticks can also signal bearish and bullish reversals at times.

What is the difference between a Doji Candlestick and a Spinning Top Candlestick?

The key difference between a Doji Candlestick and a Spinning Top Candlestick lies in their body size. While both are similar, a spinning top has a larger body compared to a doji. Specifically, a candlestick with a body up to 5% of its total length is considered a doji, and anything exceeding this 5% mark is classified as a spinning top. Additionally, spinning tops may not always indicate a price reversal; they can sometimes signal a weakening trend. In contrast, doji candlesticks typically suggest either trend reversals or pauses and indecision in the market.