The Doji is probably the most simplistic formation to learn, but it can tell us quite a bit about price action. The first candlestick formation that most traders learn is probably also one of the most important.
The Doji is notable for its small body found in the middle of the candle, with wicks on either side. The picture below illustrates the Doji formation: The skinny body of the doji candle illustrates indecision. During the formation of this candle, prices moved higher, and prices moved lower — but they ended up closing very close to where they had opened. Perhaps more important than the Doji itself is what else might be happening with price action leading into, or around the Doji formation.
Because after all, the indecision of a Doji candle can only tell us so much, right? If the currency pair is or has been trending into the Doji formation, this can be an excellent sign of a retracement, as the picture below illustrates. While it would be optimal for each Doji printed to mean that we have a brief pause in the trend, so that we can re-enter before the trend continues, this will unfortunately not always be the case. And the reason for this is that indecision, and further, retracements — can last for much longer than one simple candle.
The picture below will illustrate this premise: The Retracement may extend past the Doji, as indecision may continue. To take the above concept a step further, when a doji may be simply the beginning of a retracement or period of indecision in the market; price action can show multiple dojis over a period of time. The picture below will illustrate: The multiple dojis are simply highlighting more-extended indecision. Think of price action leading up to a really big fundamental news event.
Traders around the world know this event is going to happen, so there will often be reticence to bid prices significantly higher or lower. This indecision in the market place can be shown in the form of multiple dojis in a short period of time.
So, traders are best served by assuming that future price action is unpredictable, and setting their trades up so that wins may benefit them more than losses may hurt them. This is where the doji formation can be most advantageous; in situations in which traders may be able to gleam favorable risk-reward ratios. This can be done with the addition of support and resistance to highlight where traders these situations might present themselves. After running from 1.
After running so far, so fast, and upon intersecting into a strong area of support, indecision entered the marketplace in the form of the doji. So, first things first — if trading reversals, use strong risk management.
Traders want to look to incorporate additional analysis into their repertoire to avoid the effects of reversals gone awry; a simple doji formation is not enough alone to trade a reversal. In the above 4-hour chart, we get a much more granular look at the doji that was investigated in the previous example. We can then incorporate other principals of price action, such as up-trends form continuous higher-highs and higher-lows.
On the 4-hour chart, we wait for the higher-low to be printed, and then we can look to enter shortly thereafter; placing a stop just below the low of the doji, and looking for a minimum risk-reward ratio. This way, if the reversal does pan out — the trader can profit handsomely. Do you not yet feel comfortable reading and grading price action? Register here to start your Forex Trading Education. Forex — Secrets of Profitable Forex Traders.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. Click here to dismiss. Price action and Macro. The Doji has a skinny candle body, with wicks on either side. Foundations of Technical Analysis: Classic Chart Patterns, Part I.
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