FXCM Insights

Chart Patterns: Doji

What Are Japanese Candlesticks?

One of the oldest and most popular forms of technical analysis is known as Japanese candlestick charting. Dating back to 18th century Japan, candlestick charting techniques were first developed as a method of analysing price movements in domestic rice markets. A prominent rice trader of the period, Muneshi Homma, is credited with inventing the guiding principles for modern Japanese candlestick charting techniques.1)Retrieved 12 September 2016 Japanese Candlestick Charting Techniques

For over 300 years, candlesticks have remained a respected and viable technical analysis approach. In contrast to line, point and figure, and open-high-low-close (OHLC) charts, candlesticks record pertinent market data points as well as provide a visual illustration of buying and selling activity.

A candlestick records five important pieces of market information that define price action for a specified period:

A candlestick consists of a body and tails (also known as wicks). The body of the candlestick is the range between the open and close. The tails of the candlestick represent the distance between the upper and lower extremes in relation to the body.

What Is A Doji?

A doji is a candlestick that has a closing price that is very near to its opening price. The anatomy of the doji is unique to other candlesticks, in that the range of its body is very small or nonexistent. Often, the entire body of a doji can be represented by a single horizontal line, closely resembling a cross or an addition sign. The length of its tails, or the vertical range of the candlestick varies depending upon the magnitude of price action outside of the open and closing price.

The doji is one of the most readily identified chart patterns among technical traders. It is seen to be a neutral pattern, in that neither buyers nor sellers could win the battle to move the prospective market substantially higher or lower during the specified period. A doji is often an indicator of a pending breakout, as the formation itself signals a compression of price action and consolidating market conditions.

Technical traders and chartists interpret the doji in a number of different ways. On a stand alone basis, the doji can be seen as a momentary pause in a longer term trend, or possibly an exhaustion point in price action. When used as part of a more complex chart pattern, the doji can function as a signal of market reversal, or pending breakout. Morning stars and evening stars are examples of the doji candlestick being used within a larger chart pattern.

Types Of Doji

There are five distinct types of doji, each with specific characteristics. Each variety of doji is interpreted by technical traders to be a sign of unique market conditions, and potentially different price actions.

The five types of doji are:2)Retrieved 12 September 2016 https://www.dailyfx.com/forex/education/trading_tips/post_of_the_day/2012/03/21/Did_You_Know_That_There_are_Five_Different_Types_of_Doji_Candlesticks.html

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References   [ + ]

1. Retrieved 12 September 2016 Japanese Candlestick Charting Techniques
2. Retrieved 12 September 2016 https://www.dailyfx.com/forex/education/trading_tips/post_of_the_day/2012/03/21/Did_You_Know_That_There_are_Five_Different_Types_of_Doji_Candlesticks.html