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The standard doji candlestick is a reflection of uncertainty in the market, and is characterized by an extremely small body (nearly identical opening and closing prices) with relatively long wicks or shadows.
In the image below, the two candlesticks on the left are standard dojis, while the two on the right are called “long-legged dojis”.
In terms of market psychology, a doji represents a period in time where bulls are able to push the price far beyond the opening price before bears take over and push price back, or vice versa.
In the end, both bulls and bears were able to equally influence the price with no clear winner. The long-legged doji is an extreme variation of the traditional doji, and represents a more volatile extension in both bullish and bearish directions.
The two doji candlestick variations above represent uncertainty and could be viewed as good indicators for trade entries.
However, when combined with other indicators, the presence of a doji candlestick may be a good signal to close a profitable position, at least partially.
Examples of doji candlesticks
On this BTC/USD 1-hour chart, a doji candlestick is highlighted in green. By itself, the doji doesn’t really give much in the way of useful information. However, within the context of the preceding bearish and subsequent bullish candle, we can paint a clearer picture.
The long wick of the bearish candle indicates an extended push by bears that was strongly bought back up by bulls. The formation of a doji at this point in time suggests that bears have taken a step back after underestimating the buyback strength of the bulls.
In the end, the bulls take advantage of the situation and push the price up with a strong bullish candle before the bears take over again to push the price down to a new low.
With this in mind, it’s important to remember things could have gone either way after the formation of a doji – it’s an indecisive candlestick.
The analysis above “makes sense” in hindsight, but may not have been immediately apparent. Below are a few more examples of doji candlesticks on the BTCUSD 1-hour chart. The third one is of the “long-legged doji” variety.
Finally, here’s an extreme example of a long-legged doji on the BCH/USD 1-day chart.
This particular candle has 12% of volatility between the high and low price, and it appears at the end of a 200% uptrend.
With so much preceding bullish momentum, this sudden doji candle suggests the bulls and bears have formed an equilibrium, at least for time being.
Long-legged doji candles are relatively rare on high timeframe charts, so the presence of this candle could be seen as a good indicator to get out of a long position because the sudden indecision could be a catalyst for a downward move – and that’s exactly what happened.
Dragonfly, gravestone and four price dojis
The dragonfly doji often indicates a bullish reversal as downward bearish movement is strongly bought up by bulls resulting in a strong close that is nearly equal to the opening price.
On the contrary, a gravestone doji depicts the opposite situation – bears killing bearish momentum forcing price to close at opening price during an uptrend.
A four price doji is extremely rare, and occurs when the opening, high, low, and closing prices are equal.
Examples of dragonfly, gravestone and Four Price Dojis
The BCH/USD 15-minute chart below shows gravestone doji at the local top of an uptrend. In most cases, a gravestone doji is followed by an immediate downward move as bears that over price action for the time being.
On the contrary, a dragonfly doji is a bullish reversal indicator that shows bearish momentum drying up. In this example on the BTC/USD 15-minute chart, the dragonfly doji is followed by a strong uptrend with very bullish candlestick patterns.
For regularly traded assets, four price dojis are extremely rare on high timeframe charts, but are easily spotted on 1m charts, especially during periods of low trading volume.
On the ETH/USD 1-minute chart below, you can see a few examples of four price dojis where the opening, high, low, and closing prices are equal.
Doji candlesticks can be extremely useful when used in conjunction with other indicators.
Traditional doji and long-legged dojis depict an indecisive equilibrium standoff between bulls and bears.
As a trader, you should be constantly on the lookout for high-probability trades, so an indecisive candlestick like the doji is usually not a good spot to open a position.
However, a doji can be a good place to close or reduce a profitable position. On the other hand, gravestone and dragonfly dojis do indicate a bias, and can represent good places to open either a short or long position.
This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product.
WRITTEN BYBrian Li
Trader, analyst, Liquid contributor. Editor of Decrypto.net.