Charting the Markets: Doji Patterns

May 9, 2024

Continuing where we left off, in this edition of ‘Charting The Markets,’ we will be taking a deeper look into candlestick charts and the common types of patterns these charts can reveal. Candlestick patterns are useful price formations that reveal a lot of information about the current state of the market of a certain asset. They may also provide guidance about the future direction in which the price of the asset might move. 

To start with, let’s recap what candlestick charts are. Candlestick charts offer detailed information about price movements within a particular time frame, including the opening, closing, high, and low prices. Each "candlestick" consists of a body (the range between the open and close) and wicks (shadows) that extend to high and low prices. Green (or white) candles indicate prices closed higher than they opened, while red (or black) candles show prices closed lower than they opened. 

Candlesticks do not always begin and end exactly where the previous one closed, often creating a "gap" between them caused by significant price increases or decreases between trading periods.

As candlesticks started to get more and more popular with traders, people began noticing certain patterns that could potentially reveal upcoming market trends. These patterns are very popular among traders nowadays, as they believe that they’re able to predict future price movements on the market by interpreting and analyzing the candlestick patterns. But, even though 100% accurate predictions do not actually exist in the real world, knowing these patterns and recognizing them in real-life charts can unmistakably be beneficial for all fledgling traders. Though many types of candlestick patterns exist, this series of articles will only provide an overview of the most frequently occurring and reliable ones. 

Reverse Candlestick Patterns 

These candlestick patterns signal a decline in the current market trend and possibly indicate the beginning of a new trend. However, please keep in mind that for a prediction to be correct, most patterns need to be followed by the right corresponding candle. The most popular reverse patterns, which consist of no more than 3 candles, are: 

  • Doji 
  • Hammer & Hanging Man 
  • Inverted Hammer & Shooting Star
  • Bullish & Bearish Harami 
  • Bullish & Bearish Engulfing 
  • Morning & Evening Star

In this article, we will focus on Doji patterns. Doji patterns occur when a candlestick's opening and closing are in the exact same spot or in close proximity. There are 5 types of Doji patterns: 

  1. Traditional 

This is the most basic and well-known type of Doji pattern. It is easy to remember and even easier to spot, as it resembles a cross – the opening and closing prices are found in the middle of the candle, and they occur in the same spot. 

  1. Long-legged Doji 

This type of Doji pattern contains long upper and lower shadows. Between these shadows, the opening and closing of the candle occur, once again, in nearly the same spot. This pattern signifies uncertainty. 

  1. Dragonfly 

This type of Doji pattern contains a considerable upper shadow but no lower shadow. It signifies a shift from a bear trend to a bull trend, as the lower shadow clearly reveals that buyers are currently ramping the price up. The pattern is further underpinned and strengthened if the candlestick occurs near the support line. 

  1. Gravestone Doji

Conversely, a Gravestone contains a long upper shadow but no lower shadow. It signifies a shift from a bull trend to a bear trend, as the higher shadow reveals that sellers are currently tapering off the price. The pattern and predictability are strengthened if the candlestick occurs near the resistance line. 

  1. Four-price

Lastly, the Four-price pattern occurs when the opening and closing prices are in the exact same spot as the lowest and highest points are. It is a very noticeable trend, which signifies uncertainty or, in some cases, a very calm market. 

While this might seem like it’s a lot to take in, the simple, general principle is – if a Doji pattern occurs near the resistance line, you should consider selling. If a Doji pattern occurs near the support line, you should wait for a consequent candlestick, which will confirm the upcoming market trend. The same holds true for the next candlestick pattern, which we will discuss, so be sure not to miss the next Ping Academy article.

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