With an average daily trading volume of $5 trillion, Forex trading is one of the most active markets in the world. Forex traders use various methods and technical analyses to buy one currency while selling another to make an optimum profit.
Candlestick patterns are one such method used to forecast price movement in the future. Candlestick charts are one of the most common types of technical analysis used when trading Forex, as they allow traders to quickly comprehend price information using only a few price bars.
What Is the Doji Candlestick Pattern?
The Doji candlestick, also known as the Doji star, is a distinctive candle pattern that shows hesitation and weakening momentum of a trend in the market. When a Forex currency pair opens and closes at the same level, a Doji is formed. Doji has little or nonexistent bodies and resembles a cross or plus sign.
From the standpoint of auction theory, Doji shows stalling on the part of both buyers and sellers. Because everyone is evenly matched, buyers and sellers are at odds with the currency price remaining stagnant.
The wick is formed by the upward and downward movements that occur between open and shut. The wick is the vertical line in the Doji pattern, while the body is the horizontal line. Because the top indicates the highest price and the bottom represents the lowest, the wick can be any length.
When the price closes at roughly the same level as it opened, the body is created. The body represents the difference between the beginning and closing price. The height of this element can change, but not the width.
Types of Candlestick Pattern
Doji candlesticks come in various forms, but the majority of them resemble a cross or a plus sign. Depending on market conditions, several types of Doji patterns may appear during consolidation periods, before price reversals, or during continuation trends.
The common Doji is the most standard type of Doji candle. The body of this candlestick is small, and it casts shadows. It takes the shape of a plus sign when traders are unsure about the anticipated market direction.
The vertical lines above and below the horizontal line are simply extended farther in the Long-Legged Doji. This means that the price action of the candle moved substantially up and down during the span of the candle but that it closed at about the same level as it opened. This demonstrates the buyer’s and seller’s decisions.
The Dragonfly Doji can emerge at the peak or bottom of a trend and indicates the possibility of a shift in direction. Prices did not increase over the beginning price since there is no line above the horizontal bar, forming a ‘T.’ This Doji’s long lower wick at the bottom of a bearish move is a very bullish indication.
In comparison to the Dragonfly Doji, the Gravestone Doji is the polar opposite. When price action opens and closes at the lower end of the trading range, this pattern appears. Buyers were able to push the price higher when the candle opened, but they could not maintain the bullish momentum by the close. Thus, this is a bearish indicator at the top of an upward trend.
How to Read Doji Candlestick and Benefit From It
Whenever you deal with Doji candlestick, consider the following information:
The capacity to read market emotion is one of the essential features of a candlestick chart. The greatest illustration of reading market emotion is a Doji candle. This pattern is the result of market indecision. A Doji candlestick indicates that neither the bulls nor the bears influence the market.
If present conditions do not change, a Doji candle provides traders with an early warning that there may be a change in market momentum or a likely change in direction.
Using Doji in Trend Trading
Doji candles that develop at significant market highs or lows can occasionally become locations of support or resistance. A Doji candle has little value when it forms in the middle of a trend or trading range. Doji candles frequently appear during periods of consolidation and can assist traders in identifying possible price breakouts.
Doji candles provide traders with good entry points when they develop near round numbers, past support, resistance levels, pivot points, or Fibonacci retracements.
The Strategy of the Double Doji
A single Doji is usually a decent indicator of indecision, but two Doji’Doji’s after the other) is an even stronger indicator that frequently leads to a powerful breakout. The Double Doji method aims to profit from the strong directional move that occurs following the time of hesitation. After the Double Doji, traders can wait for the market to move higher or down.
Doji patterns can help traders evaluate whether a short-term trend is likely to reverse or persist by confirming or negating important highs and lows. In other words, a single Doji is only a small part of the picture when it comes to assisting a trader in determining a greater likelihood point to enter or exit a position.
To accurately predict the market’s move, Forex traders must combine the Doji candle with other technical indicators or price movement.