Dojis are single candlesticks where the open and close are the same or very close together. This price action makes the body of the candle look like a horizontal line. The length of the wicks will vary, and that can offer a clue as to whether a doji pattern is expected to be bullish or bearish.
Although there are many variations, three common dojis are shown below.
If the open and close are near the middle of the price action, then the doji is sometimes called a Rickshaw Man. This is believed to show a market in balance, and although traders aren't offered any clues about the future direction of prices, this type of doji is often thought of as a warning that a big move is likely.
A Dragonfly doji is formed when the open and close are near the high. Although prices moved lower as the Dragonfly formed, they rallied back to the high at the close, and this is considered bullish.
How Traders Use It
An example is shown on the weekly chart of the U.S. dollar below. On the left, a dragonfly doji is seen just before an uptrend. Two variants of the Rickshaw Man doji then occur, and shortly after these candlestick forms, a significant trend follows.
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 It Matters 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, the trader is likely to be able to identify the probable direction of the breakout. This could allow them 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.
(This article originally appeared on ProfitableTrading.com.)