My Money Blog

Japanese Candlesticks – Part Two: Doji

Posted on 01. May, 2009 by Casper in Forex

By: Admin

A Doji is a very important aspect of a candlestick. It not only tells a story all on its own, but gives important information when used as components with other patterns. Their shadows can be either long or short and usually take the shape of a plus sign, cross or inverted cross. A doji occurs when the open and closing prices were virtually the same. Although the open and close should be the same it does not always occur in that precise way. Trading will usually fall below and above the open and close very close or exactly as it opened.

The importance of a doji depends on the candlesticks before or the trend previous to the doji. After a long white candlestick or an advance, it indicates that the buying trend has begun to slow. After a long black candlestick or decline, it would indicate that the pressure to sell is easing. A doji would indicate that the supply and demand are beginning to be more matched and a new trend may be on the horizon. A doji after a long black candlestick, traders should beware and on the lookout for a morning doji star.

The long legged doji have long shadows, both above and below the real body and are generally equal in length. These indicate that trading went above and below the opening price but closed evenly with the opening. After frantic selling and buying, the end result shows little change in opening and closing prices.

Two more types of doji are dragonfly and gravestone doji. A dragon fly doji is when the open, high and close are equal in price and the low creates a long tail or shadow with no shadow above the body. This shape resembles a “T” and indicates that there was a lot of selling, driving prices down. In the end, buyers drove the prices back up to even or within a small difference of the opening prices. This occurs both on highs and lows. It also shows that buying drove the prices up and in the end, selling regained control and drove the prices back down to even or within a small difference of the opening price. After either a long black or long white candlestick, it could signal a reversal or end to the current trend, in which both require confirmation.

A gravestone is when the open, low and close are equal and the high creates a long shadow above the body. This shape looks like an upside down “T” and has no lower shadow. Gravestone doji indicates that buying dominated the trend throughout the trading and drove prices higher during the trading and near the end, selling began to rebound to even or with only a slight difference between the opening and close. Although this may indicate a failed rally to regain control, the high indicates pressure to buy. After a long black candlestick it would tell us that there was pressure to buy. After a long white candlestick it would mean there was pressure to sell. Either of these could indicate a turning point for the current trend.

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Tags: Forex, Japanese Candlesticks