Secret Trading Tip: Using the Doji

Discussion in 'Stock picks and trading strategies' started by johntrade, Mar 7, 2011.

  1. johntrade

    johntrade New Member

    On a candlestick chart, there is a pattern that technicians refer to as a doji. A doji has top and bottom shadows like a regular candlestick, but has practically no real body. This happens when the opening and closing price are the same, or so close that they just leave a sliver of a real body. A doji looks like a plus sign or cross.

    Finding a Doji can tell a technical analyst key things about a market trend

    Doji are considered a good sign of indecision in a market. Finding a doji with short and nearly identical shadow points suggests a neutral trading session. The market opened, had a small trading range, and then closed at the opening price. Neither bulls nor bears got the upper hand. Longer shadows show potentially greater indecision. They are neutral on their own, but paired with a trend, a doji can hint at a coming change.

    Market participants looking for a reversal like to see Doji

    Doji are like little battle scars of conflict. The trade had action but in the end no one won the day and the market closed pretty much where it started. If the market was on a bullish trend, this could be a signal that the bears were coming in. The opposite could be deduced if the market was in a bearish trend.

    A technician’s reversal argument is simple. If the dominant trend were still in control, there wouldn’t have been a wrestling match for control. And there would have been a clear winner. Instead, the real body showed that the day was almost a wash.

    Simple doji to look out for:
    Long hollow or green candles followed by a doji. An uptrend could be nearing its end if a doji reveals selling pressure. Look for confirmation from additional downside action.

    Long filled or red candles followed by a doji. Any downside action followed by a doji could mean buyers are coming in or selling pressure is abating. Watch for upside confirmation after this kind of formation.

    There are also a few special doji to watch for. Some form patterns with fantastic names like abandoned baby, morning star, evening star, and tri-star. Two worth mentioning are the dragonfly doji and gravestone doji. These are unique in that the real body is at the top or bottom of a long shadow.

    A dragonfly marks a session where the open, high, and close are all the same and the low forms a long lower shadow. This can be a sign that sellers were in charge for the trading session, but at the end of it, buyers came back. A dragonfly can indicate a bullish reversal in a downtrend or a bearish reversal in an uptrend.

    A gravestone comes when the open, low, and close are all the same and the high makes a long upper shadow. This can happen when buyers are in the driver’s seat for the trading period but sellers come back at the end. Just like the dragonfly, the gravestone’s potential for indicating a reversal will depend on the prevailing trend.

    Both patterns need to be seen as part of a bigger picture. Look for confirmation after they occur.

    Doji are common candlestick patterns – look for them in your favorite market and watch what happens around them

    Doji are candlestick patterns that can show a significant wrestling match is in the works. Neither the bull nor the bear are dominating the trading period. This means that you have to look at the whole chart – not just a single candlestick – to confirm the potential in a doji. What you are looking for is something that will tip the scales, a sign that someone will take the advantage. I look at doji as yellow flags during any trend. Tread carefully until the bigger picture is revealed.

    Larry Levin
    Founder & President - Trading Advantage
    Receive 1 FREE trading tip per week from Larry Levin
  2. Zumwalt

    Zumwalt Member won weekly contest 3x

    Interesting. Is there a Jesus doji?
  3. ShermanTanker

    ShermanTanker Member won weekly contest 3x

    The Holy Moly Doji is what I trade.

    It is the stronget Doji in the Dojo.

  4. 8307c4

    8307c4 Member weekly contest winner

    I am sure if tests were to be conducted that this apparent science would be correct just about half the time,
    which is just like every other so-called science surrounding the market, they all look amazing until they're put to
    the test and where the rubber hits the road, the truth comes out.
    They are right half the time because by default a stock either rises, or falls.
    It has to, what else is it going to do?

    Unfortunately you can't come out ahead by being right half the time
    hence the old saying holds true, there is no such thing as a free ride.
  5. Technical Alchemist

    Technical Alchemist forum leader won penny contest 13x won weekly contest 12x

    I must caution against placing too much emphasis on a single cangle formation or even a grouping of candle formations. They should not be viewed in isolation. A doji gives you no tradable edge without viewing it in context. A doji that gaps higher after a parabolic run higher (aka evening doji star) might signal a reversal lower, but note the doji is only a component of the overall technical signal. First we need an established uptrend, then a gap higher where the doji is formed, followed by a long black candle or engulfing pattern that leads us to believe the move is exhausted.

    John, I hope your intentions are good but it is incomplete information such as what you've posted that contributes to the poor reputation some fundamental analysts have attributed to technicians.

    For anyone wishing to learn more about candlestick charts and dojis the definitive guide from the man who brought the discipline from Japan to the West is Japanese CandleStick Charting Techniques by Steve Nison.
  6. shulink

    shulink Member

    Yah, a candlestick doji should not be used on its own. It is best when you combine it with other technical indicators like stochastic or macd. I sometimes trade the doji for trend reversal, but I always wait for a confirmation the next day before buying. A gap up on the next day is usually nice.
  7. Blaine Tarr

    Blaine Tarr forum leader won penny contest 24x won weekly contest 20x

    Okay, you really don't even need to be right half the time, but half could be extremely well if you stop quickly.

    For example you start with 100 dollars and your stop is 3% for every trade that goes in the opposite direction and you miss the first 4 out of 5 times, but that 1 last time the stock goes green and you sell for a 15% gain you will come out ahead by $1.72 or 1.72% after the fifth trade. I know its not much but that is only being correct 20% of the time. Now the above calculation did not include commissions, but I used only $100 as an example. But you can make money without being correct very often. Its all about risk management. This philosophy of having to be correct most of the time is a fallacy and a limiting belief than can discourage new investors/traders.

    Cut losses quickly, and let the winners go to your target, or until you recognize a top forming. If your letting your losses ride in hopes of a rebound only to see it go lower, you should re-think your strategies.

    This is the example of using a 3% stop with the last trade winning for 15%. Of course your stops should be set according to your own willingness for risk. This example could even be 5 trades on one stock of which 4 trades failed to breakout, and then the stock finally went on the fifth.

    -3.00= 97.00
    -2.91= 94.09
    -2.82= 91.19
    -2.74= 88.45

    +13.27= 101.72

    I know there will be arguments such as; but commissions aren't included, and what if the stock gaps down more than 3%, or what if the breakout doesn't go 15%, etc.

    This is just an example to encourage you to have better risk management to make more in the long run, even if your a short term trader, heck more so if your a short term trader like myself.

    If a stock breaks out and I buy right after, I will usually set a stop a few cents or ticks below the breakout point (new support level) for very small losses in case the breakout fails. This all depends on price action of course, but is an example of how I sometimes manage risk. Small losses, big winners.
  8. probe1957

    probe1957 Member

    What btbull said. Minimize risk.

    I make bullish trades and only bullish trades because, well, that's all I know. I was looking at my YTD trade history just the other day. Trying to analyze it a bit. I make the right call, in other words, buy a stock and it moves up, a little over half the time. VERY little over half the time, actually. While my performance is less than stellar (up a little over 3% YTD), I have done that by managing my downside risk.
  9. 8307c4

    8307c4 Member weekly contest winner

    I see, and these doji sticks, they predicted that the action in Libya today would intensify which in turn would drive
    up oil prices and as an end result they would bring the entire market down, they predicted that, these doji sticks?

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