Major Candlestick Patterns
There are about 40 patterns or so in Japanese Candlestick trading signals. They all have credible probabilities of indicating accurate direction of price movements for any given market. Fortunately, they are all pretty easy to learn and remember, but in reality you can get a very profitable and successful method by using only about 12 of the major patterns. Many of the rest are just confirmation of the major 12, to ensure correct interpretation.
Major signals occur in the charts often enough to be useful in producing a ready supply of trades as well as indicating strong reversals to take profits and enter new trades. Generally, the major candlestick patterns are useful enough for the average trader to be successful, if the signals are learned and utilized correctly. Thats where it becomes beneficial to learn them all, since the minor patterns can give additional information to help you increase your success and minimize your risk.
The DOJI
The DOJI is a single candle and may also appear as an element in several important candlestick patterns. It is formed when the open and close occur at the same or very close to the same level in a specific timeframe. This appears as a “cross” formation. The horizontal line represents the open and close occurring at the same level, so it appears as a line. Think of it as a squashed down box. The vertical line represents the high and low trade range during that time. Prices move up and down during the session, but close at or near the opening level. The lengths of the upper and lower shadows, or wick, of a DOJI vary so that it may look like a cross, inverted cross or a plus sign.
General Analysis: The Bulls and the Bears are conflicting. This shows strong indecision in the market at the time between the buyers and sellers. At the end of a trend, either up or down, this should be a red flag for a possible reversal. A general rule of thumb is that when a DOJI appears at the top of a trend in an overbought area, sell immediately. If the DOJI is seen at the bottom of a downward trend, wait to see if there is a buying (bullish) trend the next timeframe.
The LONG LEGGED DOJI
The LONG LEGGED DOJI has the body near the middle of the day’s trading range with almost equal shadows above and below the body.
General Analysis: It is almost a perfect indication of indecision of the market direction. Especially if the market is overbought or oversold, depending on where this DOJI appears, it could indicate a reversal is about to occur.
The DRAGONFLY DOJI
The DRAGONFLY DOJI has the body near the high end of the day’s trading range with virtually its entire wick below the body.
General Analysis: This DOJI occurs when trading opens, trades lower than it opened, then closes at or extremely close to the opening price, which is the high of the day. If it occurs at the top of an upward trend, it is a variation of the HANGING MAN. If this occurs near the bottom of a downward trend, it may also be called a variation of the HAMMER. A very long shadow on the DRAGONFLY DOJO at the bottom of a trend indicates a very strong bullish move.
The GRAVESTONE DOJI
The GRAVESTONE DOJI has the body near the low end of the day’s trading range with virtually its entire wick above the body.
General Analysis: This DOJI occurs when trading opens at the low of the day, trades higher than it opened, then closes at or extremely close to the opening price, which is the low of the day. At the top of an upward trend, it is a version of the SHOOTING STAR. At the bottom of a downward trend, it is a variation of the INVERTED HAMMER.
DOJI’s Within Patterns
A DOJI by itself can be a strong indication of a reversal. However, DOJI’s that occur with another signal or within multi-signal patterns make those signals more convincing reversal signals
Harami – Doji Evening Star - Abandoned Baby
A DOJI represents indecision in the market. Armed with that knowledge alone, you may be able to take advantage of reversals at the most profitable time. It doesn’t matter if you are trading long term, medium term, short term, or short short term. Even trading one-minute charts the DOJI always indicates indecision in the market in any time frame. And that could lead to a reversal depending on the other indicators.
