Online forex trading – Doji

  by Kunle Adeyeri

The Japanese invented the candlesticks and started using it in trading rice as far back as the 17th century. Today, the Japanese candlesticks have been adapted by the Western world in the world of online trading. Even though there are other chart graphs such as bar and line, the candlesticks give better visual and graphical details

A trader,like me, who mostly trades bare with the candlestick analysis still marvels at the Japs invention. I say this because the understanding of candlestick charting and analysis in technical trading solves over 70 per cent, if not more.

One of such inventions of these candlesticks world is the Doji. Doji can be likened as most authors have written to a tug of war where both sides at the end pull the rope but no one could overpower the other resulting in a stalemate. Hence its significance in trading.

Doji represents indecision and weakening of a trend and sends a warning signal to a trader who knows how to interprete it. A typical candlestick in forex trading has an opening price (O), High(H) Low (L) and Closing price (C). The relationship between the opening and closing is crucial to determining what is going on in the market.

In case of Doji the opening and closing price are virtually equal. Doji are important candlesticks that provide information on their own and as components of in a number of important patterns. Doji form when a currency pair open and close are virtually equal. The length of the upper and lower shadows can vary and the resulting candlestick looks like a cross, inverted cross or plus sign. Alone, doji are neutral patterns. Any bullish or bearish bias is based on preceding price action and future confirmation. The word “Doji” refers to both the singular and plural form.

Ideally, but not necessarily, the open and close should be equal. While a doji with an equal open and close would be considered more robust, it is more important to capture the essence of the candlestick. As earlier said Doji convey a sense of indecision or tug-of-war between buyers and sellers. Prices move above and below the opening level during the session, but close at or near the opening level. The result is a standoff. Neither bulls nor bears were able to gain control and a turning point could be developing.

Determining the robustness of the doji will depend on the price, recent volatility, and previous candlesticks. Relative to previous candlesticks, the doji should have a very small body that appears as a thin line. A doji that forms among other candlesticks with small real bodies would not be considered important. However, a doji that forms among candlesticks with long real bodies would be deemed significant.

The relevance of a doji depends on the preceding trend or preceding candlesticks. After an advance, or long white candlestick, a doji signals that the buying pressure is starting to weaken. After a decline, or long black candlestick, a doji signals that selling pressure is starting to diminish. Doji indicate that the forces of supply and demand are becoming more evenly matched and a change in trend may be near. Doji alone are not enough to mark a reversal and further confirmation may be warranted.

After an advance or long white candlestick, a doji signals that buying pressure may be diminishing and the uptrend could be nearing an end. Whereas a security can decline simply from a lack of buyers, continued buying pressure is required to sustain an uptrend. Therefore, a doji may be more significant after an uptrend or long white candlestick. Even after the doji forms, further downside is required for bearish confirmation. This may come as a gap down, long black candlestick, or decline below the long white candlestick’s open. After a long white candlestick and doji, traders should be on the alert for a potential evening doji star.

I will summarise the types of doji available as minus sign (-), plus sign (+), inverted cross, T-shape (dragon fly doji), inverted T (gravestone doji). It has been said that the prior trend is crucial but in my practical application of doji to trading the periodicity and the range(maybe daily) matter. I also consider the minus sign as the most potent or robust of all for example say EUR/USD : O =1.3320, H =1.3320, L =1.3320, C =1.3320). The higher the time frame (periodicity) the more robust the weakness and also the higher the reversal will be.