The doji is a candlestick formation that can be seen on any time frame, but the larger the time frame which forms the doji, the greater the significance. This candlestick pattern represents an even balance between buyers and sellers at the close of the doji candle.
The Doji Itself
There are really two important factors to look at with the doji candlestick formation, the first being the doji itself. Whether or not the candle closes just slightly positive, slightly negative, or exactly where it opened doesn’t really matter, what matters is where it closes in relation to the “stick” or the tail of the candlestick.
If we have a doji that looks like a + sign then we have a market that is perfectly balanced during that time frame. If however we have a doji that forms at the top the candlestick with a long tail below, this is telling us that we had a significant amount of sellers, but the buyers were able to overtake the sellers and bring price back up to where it opened. This process would be reversed for a candlestick with a doji at the bottom with a long tail above.
The Doji in Context
The second important factor to look at is where the doji candlestick forms in relation to the surrounding candlesticks. In Steve Nison’s book, Japanese Candlestick Charting Techniques, he goes over all the different candlestick chart patterns in context and what they mean, but the main takeaway is think about it from the angle of human emotion. If we are trending up and we form a doji with a long tail above, this is signalling that buyers pushed the security higher early on, but sellers managed to push the security back to the opening price at the close of the time frame.
The most significant thing to realize when you see a doji candle is that it is a consolidation of prices that could lead to a reversal. I stay clear of trading when I see multiple doji candles in a row and if a doji forms at the top or bottom of a trend, I look for a break of the candlesticks high or low as a possible reversal in the trend.
Here’s how I use these candlesticks to swing trade stocks.