What Is a Doji Pattern?
The Doji is a commonly found pattern that has an open and close that are virtually equal, forming a candlestick that looks like a cross. A Doji is often found at the bottom and top of trends and is considered a sign of possible reversal in the markets.
Example of a Doji
What Does the Doji Signal?
The Doji represents clear indecision in the market, where the bulls and bears are fighting for control over the market and during the trading period there were no clear winners. If the Doji forms in an uptrend or downtrend, this is normally seen as significant, as it is a signal that the buyers are losing momentum when found in an uptrend and in a downtrend it is a signal that the sellers are losing momentum.
The creation of the Doji pattern illustrates why the Doji represents such indecision. After the open, bulls push prices higher only for them to be rejected by bears and pushed lower. Bears are unable to keep prices lower and bulls push back to the opening price of the candle going into the close.
Trading a Doji Pattern
Looking at the 2-hour time frame of BTC (Bitcoin) we can see a local high formed before a decent 25% correction. Although I don’t have any levels marked out to make the chart clear and easy to read, there were other indicators telling that this move had hit a top besides the Doji. Not discrediting at all from the fact that the Doji candle was the absolute highest point before the pullback, it was just one of many indicators calling a top.
Looking at the 4-hour time frame of the DJI (Dow Jones Industrial Average Index) we can see a pretty obvious double top that was formed solely off of the Doji pattern and a single level of resistance. Marked out on this chart is a zone of accumulation (green) and distribution (red) where the DJI was trading in between. The 1st top saw a breakthrough of $25,800 before forming a Doji pattern and pulling back down, and the 2nd top saw another retest of that level which failed and formed a Doji right along the bottom side of that resistance. The end result after the 2 dojis were formed was a pullback from $25,800 all the way down to $22,419.
Similarities Between the Spinning Top and the Doji
A major similarity between a Doji and Spinning Top pattern is that these patterns are both commonly seen as part of larger patterns, such as star formations. Both the Doji and Spinning Top represent neutrality in the market and that the buying and selling pressures are neutral, equal in price from the candle open to candle close. They both also represent that the trend is losing momentum and coming to an end for a potential reversal, whether it be bullish or bearish.
Differences Between the Spinning Top and the Doji
The difference between a Doji and Spinning Top pattern is that although spinning tops are similar to Dojis, their bodies are much larger, even though the open and close are very close. A candle’s body can represent up to 5% of the size of the entire candle in order to be classified as a Doji, otherwise it becomes a spinning top.
Limitations of the Doji
Doji patterns just like any other pattern comes with its set of limitations. Doji patterns are very commonly found on candlestick charts so you have to be cautious of the Dojis that don’t carry any hidden meanings. If a Doji is spotted on a smaller time frame such as a minute or hourly, it doesn’t hold as much meaning compared to spotting a Doji on a larger time frame such as a daily or weekly. Larger time frames give the Doji a lot more strength and meaning, especially when seen at the top or bottom of a trend, indicating a reversal in the markets.