Doji Candle: Significance and Main Types of the Pattern
Introduction to the Doji Candle
The Doji candle is one of the key tools in Japanese candlestick analysis, reflecting the state of market equilibrium. When the opening and closing prices are nearly the same, a very thin body is formed, while the wicks indicate the range of trading. In this pattern, buyers and sellers reach a state of "stalemate," often foreshadowing a trend reversal or a period of consolidation.
The Japanese candlestick methodology originated over three hundred years ago in rice trading in Japan. Legend has it that trader Homma from Sakata developed visual rules for chart analysis to understand the sentiments of market participants. He was the first to describe the pattern we now call Doji.
"The Doji candle is a moment of truth when the market asks: 'What's next?'" — a relevant quote from a candlestick trader.
Structure and Psychological Meaning of Doji
Each component of the Doji candle — opening, high, low, and closing — carries meaning. The small body illustrates that prices tested both sides, but neither was able to prevail. The psychology behind Doji arises from the uncertainty of participants: bulls and bears are evenly matched in strength, and the next impulse often follows sharply and unexpectedly.
Modern research indicates that the appearance of Doji is accompanied by a decrease in the activity of market makers, who "recede," awaiting key news or confirmation of sentiments. This creates the effect of "calm before the storm." Traders value this pattern for its early warning of sentiment shifts.
Main Types of Doji Candles
Long-legged Doji
Characterized by long wicks in both directions. It often appears at the peak of volatility and serves as a warning of the end of the current movement. Traders pay attention to volumes: if they are sharply above average, the pattern gains significance.
Historical example: In October 2008, a Long-legged Doji appeared in the US stock market amidst the financial crisis. Prices fluctuated from $80 to $120 in a single session, after which a powerful rally of recovery began, rising by 30%.
Gravestone Doji
Features a long upper wick and little to no lower wick. It forms at the top of an uptrend and signals a shift in sentiment to bearish. A common confirmation is the closure of the next candle below the body of the Doji.
Example: XYZ Company’s stock formed a Gravestone Doji at $150 in January 2021. Trading volume doubled, and over the next week, the price dropped by 15%.
Dragonfly Doji
The opposite of the Gravestone: it has a long lower wick and a short or nonexistent upper wick. It occurs at the "bottom" of the market and foreshadows an upward reversal. The signal is strengthened if the next bar closes above the opening level of the Doji.
Example: In the EUR/USD currency market, a Dragonfly Doji formed at the support level of 1.0950 during the release of GDP data for the EU, providing a short-term upward impulse of 15 pips.
Four-price Doji
The opening, high, low, and closing prices coincide, with no wicks present. This very rare format indicates complete stagnation of interest. It is more often observed in illiquid stocks or in the lead-up to significant events when traders are "lying low."
For example, ahead of reports from key central banks in developing countries, Four-price Doji appeared on charts of local indices, followed by sharp impulses of up to 5%.
Signal Confirmation and Filtering
The Doji signal without filters can lead to erroneous trades. The following filters are used:
- Volume: An increase in volume adds weight to the pattern.
- Confirming candles: One or two subsequent candles in the direction of the anticipated movement.
- Levels: Support/resistance zones lend significance to the signal.
- Indicators: RSI, MACD help to filter patterns in a sideways trend.
Studies show that Doji with volumes above 1.2× the average confirm in 68% of cases.
Timeframes, Volumes, and Emotional Clusters
Daily Charts: Suitable for medium-term positions. Doji on daily (D1) charts reflect the decisions of institutional investors.
Intraday (5–15 minutes): Used by scalpers but require high decision-making speed and liquidity.
Weekly and Monthly Candles: Doji on weekly (W1) or monthly (MN) serves as a long-term indicator of medium- and long-term trend changes.
Emotional Clusters: In periods of panic or euphoria, Doji is particularly noticeable. During strong emotions, extreme participants exit positions, creating calm before the continuation of movement.
Strategies Based on Doji Candles
Reversal Strategies
- Bearish Reversal: Gravestone Doji at the peak of a trend + volume + confirmation — the following candle is bearish. Stop-loss is placed just above the high of the Doji.
- Bullish Reversal: Dragonfly Doji at the bottom + confirmation — closure of the next candle above. Stop-loss is set slightly below the low of the Doji.
Trend Continuation
- Inside Doji: Doji within the range of the previous candle indicates a pause before a continuation of movement.
- Doji Star: Morning Star and Evening Star use Doji as the middle element in three-candle formations, strengthening the reversal or continuation signal.
Risk Management
- Stop-loss is placed at the level of the Doji’s wick.
- Take profit is set at the nearest support/resistance levels or at a risk-to-reward ratio of 1:2–1:3.
- Position size — not more than 2% of capital.
- Multi-timeframe analysis: confirming Doji across multiple timeframes reduces the number of false signals.
Comparison of Doji with Other Patterns
| Pattern | Features | Signal Type | Context |
|---|---|---|---|
| Doji | Small body, wicks of varying lengths | Reversal/Consolidation | Strong levels |
| Hammer | Small body, long lower wick | Bullish reversal | Downtrend |
| Shooting Star | Small body, long upper wick | Bearish reversal | Uptrend |
| Pin Bar | Small body, one long wick | Quick reversal | Any timeframe |
Practical Cases and Analysis
Case 1: S&P 500 Reversal
In January 2022, a Gravestone Doji formed on the daily chart of the S&P 500 at the level of 4,500 with a volume of 1.5× the average. Over the next two days, the index lost 2%, confirming the strength of the bearish signal.
Case 2: EUR/USD Scalping
On the fifteen-minute chart of EUR/USD, a Dragonfly Doji at the support level of 1.0950 during the US labor market data release provided a short-term profit of 15 pips within 20 minutes. A stop-loss was placed below the Doji’s wick.
Case 3: Cryptocurrency Market Overview
The hourly chart of Bitcoin in March 2021 showed a Four-price Doji. An hour later, the price increased by 8%, confirming the theory of consolidation before a powerful breakout when volumes suddenly began to rise.
Case 4: Indian Stock Market
On the NSE in August 2023, a Long-legged Doji formed in Tata Motors stock after a series of bullish candles. Trading volume on the Doji day was twice the average, after which the price dropped by 5% over three days.
Conclusion
Doji candles demonstrate moments of market equilibrium and uncertainty. Through various forms of Doji (Long-legged, Gravestone, Dragonfly, Four-price), the psychological state of market participants and the potential for trend reversal or continuation is reflected. When combined with volume, support/resistance levels, confirming indicators, and multi-timeframe analysis, Doji becomes a reliable tool for entries and exits on any charts.
Consistent analysis of real cases, confirmation statistics, and strict risk management will ensure stable profitability and professional growth for traders. Experiment with Doji in demo mode, gather experience, and build your trading systems based on this powerful candlestick signal.
