Doji candlesticks have opening and closing prices that are very near each other in a given time frame signifying market uncertainty and also a possible bullish or bearish breakout.
Every forex trader knows and probably uses Japanese Candlestick charts when trading. They add to these charts the technical analysis indicators they have learned to use, such as momentum, leading, lagging and volume indicators. However, there are also 40 candlestick patterns which a trader should be familiar with. All these patterns are genuine in indicating price direction and all are not difficult to learn. Of the 40 there are 12 which are the major patterns while the remainder which is considered minor is merely used as confirmation of the indications given by the major patterns.
How to Trade a Doji Breakout Strategy:
The Doji looks like a type of cross and is a single candle where the opening and closing price are the same or very close to the same in the particular time frame being used.
The horizontal line signifies the open and close during the specific time frame. The vertical line signifies the high and low trading range for the time period in question. The prices travel up and down during the period but close on or near the opening level. The upper and lower shadows vary so that the Doji can look like a plus sign, inverted cross or normal cross. The significance of a Doji is that there is a strong battle between the market buyers (bulls) and the market sellers (bears) and there is extreme indecision in the market. A Doji that is seen at the top of a trend usually signifies a reversal as does a Doji seen at the bottom of a trend.
The Doji which looks like a plus sign is the ultimate indication of indecision as to which direction the market is going. If the market is in an overbought condition or an oversold condition this shaped Doji indicates a probable market reversal. This Doji is named the Long Legged Doji.
The Doji which looks like a cross because its body is near the upper end of the trading range of the day usually appears on the opening of the day where the price trades lower after opening and then trades higher so that the close is near the opening towards the high of the day. This Doji is called a Dragonfly and if it falls in the middle of a trading range it signifies very little however if it falls at a support level then it signifies the likelihood of a bullish breakout at the end of a bearish trend.
Finally, the Doji which looks like an inverted cross is called the Gravestone Doji and this candle signifies when at the top of a bullish uptrend that there could be a bearish breakout and if at the bottom of a downtrend a bullish breakout.
In the chart above there are several Doji candles. The blue circle has two Gravestone Doji’s in the middle of a ranging price and don’t signify any major changes to the price. However, the Graveyard Doji in the red circle signifies a strong bearish breakout. As with all technical analysis tools the trader should always confirm using another indicator. In this case the Relative Strength Index is crossing down over 50 line into bear territory. After the bearish trend the price ranges and there are several Doji’s amongst the candles which have no influence on the price. However, on the 1st February a Dragonfly Doji signifies a bullish breakout which is confirmed by both the moving average cross over and the RSI bouncing up from an oversold condition. A trader trading the Doji’s in the red and green circles would have made over a 280 pip profit.
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