Understanding Doji: A High Probability Doji Candle Price Action Trading Strategy

Doji is a powerful candle that is considered a powerful indication of a trend reversal. The problem, however, is it is least understood in the price action trading strategy.

Only 1 % of traders understand it correctly and use it effectively in trading. In this article, you will learn some really powerful concepts pertaining to the Doji candle as propounded by Stephen Bigalow.

What is Doji?

A Doji candlestick is formed when the opening and closing price of the stock is almost equal and upper and lower wicks are much longer.

How Doji Is Formed

The formation of the Doji pattern marks a certain degree of indecision. After the market opens, bulls take charge and take the price higher, and then the higher price is rejected at a certain level.

Then, bears take grip and push the price lower, but they fail to take control for long, and ultimately price recovers and closes around the opening price.

Why You Should Watch Out a Series of Doji Candles

Most traders form an opinion about trend change only after the formation of 1-2 Doji candlesticks. That’s wrong. Doji formed near resistance or support always deserves higher importance and should be taken seriously.

When a series of Doji candles is formed near the support line or moving average line reflects a lot of indecision and there is a good possibility that the trend might change from there.

Also Read: Understanding a Powerful Price Action Strategy By Laurentiu Damir

That’s the time when an investor trader should be in the alert mode to mark the behaviour of the price.

For instance, if a tradeable entity stock, crypto, gold or any other thing is in long correction phase or in the oversold condition, and then a lot of Doji candles are being formed, eventually making a double head and shoulder pattern, it signifies the correction might end now.

Also Read: Learn What Mr. Market Wants You To Listen 

If you see a strong bullish candle formation, you may be sure that rally might have started since the bulls have taken a complete grip now.

Higher Timeframe Doji Candles Are More Powerful

Also, point to take note that the higher the time frame, the more important is the formation of the Doji candle. For example, a Doji candle in a daily chart will hold more importance than the hourly chart, a weekly Doji holds more importance than a daily one, and a monthly Doji candle will be much more powerful than a weekly and daily Doji candles.

Also, higher the number of Dojis represents a higher probability of trend reversal.  So, the two important takeaways are the following:

  • A series of Dojis at oversold conditions in a higher timeframe indicates a high probability that a fresh bull rally is about to start.
  • A series of Dojis at the overbought condition reflects that the steam of bulls are about to exhaust and the rally may end now.
  • A Series of Dojis forming a double bottom pattern signifies that the bears have lost steam and bulls are about to take charge.

IGL: A Series of Dojis at the Oversold Condition

IGL chart

See the above image, after steep correction, a series of Doji candles were formed at the oversold stage, a bullish green candle is formed and the rally started.

BTC/USD: A Series of Dojis at the Oversold Phase

Doji candle

Utilizing Doji candle signals in conjunction with any other technical indicator boosts the probabilities of being in a correct trade.

When a little experienced investor/trader can identify important levels on a chart, it has to be obvious to everybody.

Knowing that a candlestick reversal signal demonstrates immediate information on investor sentiment, a candlestick investor is provided with a very efficient analytical tool.

Though this is not a series of Doji candle, but almost a similar one. This is the chart of Wipro on the weekly timeframe. You can easily see the correction ended and it was marked by the formation of Dojis and then a bullish candle formed followed by a long term rally.  It is to be noted that price action gave the signal much before the indicator that correction has ended.

Wipro chart analysis

Here are some of the scenarios when a formation of a series of Doji candles deserves serious attention:

  1. In the support zone whether its Fibonacci zone, short-term, medium-term or long-term support, moving average support
  2. In the oversold zone
  3. In the resistance zone whether it’s Fibonacci, moving average or short or medium-term support line
  4. In the overbought zone

Vikash Kumar

An investor with more than 15 years of experience in the market. I m deeply interested in positional and momentum-based trading strategies and love learning strategies and backtesting.

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