In this video, we are going to discuss a candle called the doji candle. It can be quite a significant candle when we are looking at trend reversal. It has the following features.
- Not a reversal candle on its own
- Represents an equilibrium between buyers and sellers (markets do not know which way to go)
- Open and close are around the same level.
- Requires confirmation
The doji candle comes in a few formats, but these are the four main formats.
- The standard doji candle — It has the open and close at the upper part of the trading session.
- The upside down doji — That is basically the opposite of the standard doji with the open and close at the lower part of the session.
- The dragonfly doji — It has the open and the close at the top of the session.
- The graveston doji — It is the reversal with the open and close at the bottom of the trading session.
Let's look at this chart. We have got couple of doji candles at the bottom of the downtrend. We have a strong white candle here as a confirmation to reverse that trend back up in upward direction. So, that is a classic example of how a doji along with a confirmation candle signaling a reversal. Let's look at another example. We have a couple of doji candles here. However, the confirmation candle we see here is a very small spinning top. Now, a small spinning top is not a strong confirmation to change the direction of that trend downwards. Despite the fact that we have had a strong black candle there, this black candle is simply too late to reverse this trend direction. So, the overall trend continued to go in an upward direction. When we look for doji candles, we look for confirmation, rather than just the appearance of the doji candle itself.