These Simple Candlesticks Can Signal When A Big Price Move is Coming…
In previous coverage, we’ve briefly discussed candlestick patterns in a general sense. Aside from the novelty of being one of the oldest forms of charting analysis on record, the basic shapes of candlesticks can help traders quickly and easily analyze patterns to determine their next move.
Like many forms of charting and technical analysis, however, candlesticks can also be complex and intimidating for novice traders. And that’s why it’s important to break down these concepts into easy, digestible chunks. That way, traders can not only learn the basics, but also decide for themselves much further down the rabbit hole they’d like to go.
That’s why, today we’d like to go a step further and talk about Doji candlestick patterns.
In our previous discussion of candlestick patterns, we mentioned that the shapes are meant to intuitively convey what is going on with the price action.
Dojis are candlestick patterns that happen when the opening and closing price of a security are roughly the same, or at least very close. Their shapes are meant to convey this battle between buyers and sellers (which roughly ends in a draw at the close of trading). The doji will look like a horizontal line, and the length will be determined by how high or low the security goes during the trading day, and may look like a cross, an inverted cross, or a plus sign.
Here are three common dojis you may encounter…
1) A Long-Legged Doji shows an open and close near the middle of the day’s price action. Also known as a This is thought to reflect indecision among traders, and could be a clue that a big move is likely — although we aren’t offered any clues which direction…
2) The Gravestone Doji looks like a gravestone standing up from the ground. They occur when the open and close are near the low of the day. Gravestones are a bearish signal since they show that prices could not hold on to the gains and fell all the way back to the low.
3) A Dragonfly Doji is formed when the open and close are near the high. Although prices move lower as the Dragonfly forms, they rally back to the high at the close, and this is considered bullish.
How Traders Use Dojis
Take a look at the chart of the S&P 500 Index during the summer of 2020 below. On the left, a Rickshaw doji hinted at a possible big move, and the index subsequently rallied before falling again. Moving further into July, we can see three Rickshaws hinting at a coming significant trend. A few days later, we see a Dragonfly signal a major uptrend, which lasted through the rest of the summer.
In the three examples shown in the chart, dojis served as signals that tradable market moves were approaching. This pattern can be found in any market and in any time frame.
Why Dojis Matter To Traders
When traders spot dojis, they have a signal that the price action is likely to become more volatile. They can use the candlestick pattern as a trigger to do more research. By analyzing momentum, a trader may be able to identify the probable direction of the breakout. This could allow traders to anticipate momentum signals and enter trades early.
For example, if a Rickshaw Man occurs while the Relative Strength Index (RSI) is rising, the trader could go long even if RSI is below 30, which is commonly used as the value for signaling buys.
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