Doji candlestick chart pattern is formed when opening and closing price are same or very near to each other and length of the shadow might vary. Like Spinning Top candlestick chart pattern even Doji indicates indecisiveness.When Doji is formed in a flat market it has less significance.This chart pattern usually means indecision among traders and points towards a scenario where both buyers and sellers are in equal strength. If this formation occurs after an extended move,in either direction, then it indicates exhaustion or market taking a breather. Traders should not make trading decisions based only on doji, but need to wait for price action confirmation in next sessions.
The doji with longer shadow formed after extended move usually signifies the indecision in the market and also alerts the trader for a possible trend reversal if accompanied with high volume. Need to always wait for price confirmation.Such doji with longer upper and lower shadows are called long legged doji
Doji formation with high volume is more significant as this usually points to a possibility of reversal in market direction. If it occurs after a substantial upmove with high volume, then it means that even after so much buying the price was not able to move further up as sellers are also becoming more active.This usually indicates distribution of stock taking place and the traders need to keep an eye for other bearish reversal signs.This can be a good sign to lighten the long positions.
If doji occurs after a substantial down move with high volume then it means that even after so much selling the price couldn’t move further down as buyers are becoming active.This usually means accumulation of stock taking place and the traders need to keep an eye for for other bullish reversal signs. This can be a good sign to lighten the short positions.
If Doji gets formed with high volume then the significance increases. If Doji occurs after a substantial sell off accompanied by high volume then it means that even after so much selling the price couldn’t go further down as buyers are coming to play.This usually indicates accumulation of stock is happening and the trader need to keep an eye for reversal patterns and only when confirmed need to go long. But this is usually a good sign to lighten the short positions.. If the market moves down beyond Doji’s low price then we need to conclude that market has resumed his journey after taking a breather.
Doji formed near high has more significance than at low.For the market to move up we need more buying whereas market goes down even when there is absence of selling.In an upmove followed by doji formation,if the market breaks the doji high then doji effect is nullified and same holds good for doji formed in downturn and price breaks down below doji low.Eventhough its difficult to take trading decision based solely on a doji formation, doji can be part of some interesting candlestick patterns.
Some of the other Doji patterns are Gravestone Doji, Dragonfly Doji and Four Legged Doji. Four legged doji is a rare occurrence as open,close,high and low price are same. If at all it happens then it would be for very illiquid stock or a stock which has hit lower or higher circuit at open.