ASX Charting Course


Chapter 47

Candlesticks

Formations IV

Doji

A Doji forms when the opening price is the same or very close to the closing price. They usually have a relatively tight range from high to low, but there are obvious variations.

There’s no definitive buy or sell signal to be gleaned from this formation by itself, rather the market is telling us that it is at balance. It can reveal more information when taken in reference to the preceding candles. If it occurs at the end of a trend we could say that it is a sign of weakness for that trend. It might also occur at the end of a congestion phase.

Fig 77 – Doji
Five different types of Doji are shown above. The first is a common symmetrical Doji and the next two are also Doji formations, even though they may be biased. The last two have specific names, the gravestone and the dragonfly respectively.

All these Doji reflect the same state of the market and that is one of balance or indecision as a result of the opening and closing price being equal or within one tick of each other. There is something to be suggested from the length of the shadows. A long upper shadow or any upper shadow reveals the presence of buyers. The subsequent price move higher appears to have attracted sellers as a result. One could say, the stronger group were, the buyers as they initiated the move higher while the sellers are merely responding to higher prices.

Conversely a lower shadow suggests the sellers were initially active and once they had dried up or as a reaction to some other force the buyers actually won out on the session after the close regained all the losses on the day. They were also the last group to be active. One could say “the market went out bid.”

The lack of a shadow, as in the case of the Gravestone and Dragonfly Doji, help to reinforce the thinking outlined above. In the case of a trending market it could hint at a possible reversal. In a sideways market it could suggests a new move, probably in the direction in which there is no shadow.

To draw such a conclusion more information would probably be required and therefore it would be a good idea to look at where the Doji occurs in relation to the recent activity. The market could be in a trend phase or congestion phase. It might follow an up candle or a down candle. The strength of the previous candle, as measured by the length of the real body, will also hold some significance as to how we read the Doji signal.

Fig 78

In the above diagram the unfilled white candle is an up day followed by a Doji. The Doji is in a star position, which would require confirmation with a lower session in the following trading session. After a strong up day, such as one signaled by a long white candle, the Doji is signaling a balance between buyers and sellers. It signals a potential change in direction just as much as it signals the start of a new phase of the up trend, if a trend exists.

Fig 79
This next diagram Fig 79 shows a down session followed by a Doji, but this time the Doji is engulfed by the previous candle. Once again to gain any real insight confirmation will be required in the following session. All that we can say by the presence of this Doji is that the market has paused and found some sort of price equilibrium, a balance between buyers and sellers.

Double Doji

A double Doji is, as its name implies, two Doji formations in succession. One would imagine they are not all that common, but they are more common than one would think. Like the single Doji they are a stronger sign, in fact almost confirmation, that the market has found balance and therefore at a state of indecision.
Craig MacLean is a Futures Adviser Licensed under the Australian Securities Commission, Corporations Law. The writer accepts no responsibility for any losses incurred from any action or inaction derived from the advice in this report.