Good afternoon, dear friends!
Candlestick chart on Forex provides a lot of information on what is going on in the market. According to the only candle configuration we can tell if a reversal will take place or the market makers have just taken a break before the trend movement to continue. Today we'll get focused on Doji pattern that not all the traders know to trade correctly despite its simplicity.
Let's note that any graphic pattern is easily integrated into any strategy, both indicator and trading one, if based on graphical analysis. For instance, Horizon X TS, based on chart movement from levels, may use candlestick patterns as a filter for entering to the market.
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How to identify Doji pattern on chart; its physical meaning
On the chart this model resembles a cross:
- the body forms a line, i.e. the price is Open = Close. A slight violation of this rule is permitted. For example, if candle's body makes up 1-2 points, and the range is 20-40 times bigger, it can also be considered the Doji;
- upper and lower shadows are approximately equal.
Doji pattern is often confused with such models as:
- a spinning top - a short body in the central part of the candle range, but the candle itself is not big;
- gravestone - can be defined by a long upper shadow. Ideally, the gravestone is formed when 3 prices - Closing, Opening and Low - are near each other;
- dragonfly - a mirror copy of the gravestone with the difference that the long shadow is located below. Ideally, Opening, Closing and High prices are near each other.
In Forex, these models are not used as the main signal for entering the market.
As for the physical meaning, this model indicates that the market is choosing where to move next. When Doji pattern is being formed, bulls and bears' strength are equal. If you don’t take into account additional market analyzing techniques, you can't predict the chart movement after Doji.
Let's analyze what happens on the chart when the pattern is just being formed.
On Forex, the formation of any pattern can be studied in a similar way. As you can see, sellers and buyers are absolutely equal in force. Every downward movement is followed by the similar growth impulse. As a result, the hour is closed at almost the same price it was opened at.
How to trade Doji pattern
Apart from the general situation on the market, this candle means only that at some moment bulls and bears coincided in their force. To consider the model to be reversal the following parameters are to be met:
- existence of a trend, on the top of which a pattern should form;
- Doji pattern appears after a complete candlestick; it updates trend movement extremum;
- it's highly desirable to have support or resistance nearby. Ideally, Doji tests the level and rebounds from it;
- the pattern is followed by appearance of a candle in reversal direction.
Doji pattern formed without these conditions to be met is considered weak and is not taken into work. On small timeframes it can be completely ignored.
If working with indicators, pay attention to divergence. For instance, there is divergence on MACD, and we have Doji pattern on the chart at the same moment. The probability of reversal is growing in such a situation.
If Doji "hangs" in the air, falling into the previous candlestick' range, consider it as a small correction. Such situations are not taken into work on Forex.
There's another option of this construction use - to study the situation on higher timeframes. Prior to reversal takes place on Forex, sometimes several Doji are formed in a row, which is considered to be a good signal for closing current positions of the trend and getting ready for a possible reversal.
Remember that on Forex signals' reliability is important. So, having seen Doji on the chart, don’t rush to open a deal.
Doji pattern is not categorized as a strong one. It's rather an auxiliary model indicating a possible reversal. Without 2-3 confirmations from support / resistance level and surrounding candles configuration it's not taken into work. It's better not be used as a strategy basis. We recommend to remember the rules for this model usage on Forex and to use it in your TS as a filter for entering the market, if possible. In Horizon X TS, for instance, one of the entry points provides for a retest of the zone that was previously broken through; Doji can amplify this signal if the last formed at the moment of retest. Get the details of the TS following the link below.
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