The first lesson in this multi-part series covers the doji, a neutral indicator that can be useful in either confirming or negating important price action on candle charts.
The following article will use doji for the purpose of providing specific and detailed examples; however, the same concepts apply to other candlestick reversal formations like tweezers, shooting stars, and hammers, for example. These basic formations are rather helpful ways of confirming other market reversal indicators such as the geometric, Fibonacci-based patterns we primarily use to identify technical trading opportunities at FX360.
Doji are neutral indicators that simply represent a “tie” in the never-ending battle between buyers (bulls) and sellers (bears). They form when the open and close of a candlestick are equal or very close to equal and are considered a neutral formation suggesting indecision between buyers and sellers. The bullish or bearish bias depends on the previous price swing, or trend.
The length of the upper and lower shadows (wicks and tails) may vary, giving the appearance of a plus sign, cross, or inverted cross. Completed doji may help to either confirm, or negate, a potential significant high or low, especially when found at support or resistance, after a long trend or wide-ranging candlestick.
Although they may be helpful in identifying/confirming that a trend reversal may be underway on their own, doji are not much help in making sound, high-probability trading decisions (as is the case with any single indicator). This is mainly due to the fact that even if a doji does signal the beginning of a reversal, it will not give any indication as to how far the reversal may go, or how long it may last.
NEXT: Using Doji to Confirm or Negate Action on the Charts