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THE DOJI

 

 

 

 

 

The Doji signal denotes indecision. Its significance lies predominantly in the oversold and overbought conditions of the stock. At the top of an uptrend, when prices are in overbought conditions, it cautions the trader to start locking in profits. At the bottom of a downtrend, when prices are in oversold conditions, it foretells the trader that bears are getting tired.

 

Criteria

In order for the Doji signal to be valid, the following conditions must exist:

  • The open and the close of the stock must be almost at the same price level.

  • There can be an upper shadow or a lower shadow or both.

 

The following Figure shows a Doji candle. The open and the close are the same or very near each other. What it implies is that prices had a wide range for the day, but ended up moving nowhere. The bulls and the bears had locked in in a fight. The supply of stock at that particular price was absorbed by the demand for it. The longer the upper and lower shadow, the more indecision it implies and the more forceful the trend once a decision is made. The Japanese say that a Doji in an overbought condition must be immediately acted upon. But a Doji in an oversold condition needs to see bullish candle the following day to conclude that the trend has actually reversed. There are a few other variations of the Doji signal which can be found here.

Notice the Doji in Google, Inc. The volume increased above dramatically in overbought conditions. The stock gapped up showing exuberance, but failed to form a bullish white candle. Instead it ended in a day of indecision. Smart money was selling into the last rally. Prices gapped down the next day indicating bears had won the battle and the trend was reversed.

Chart courtesy of StockCharts.com

Notice the Doji shown below in ROLTA. What does a Doji mean? Indecision. The bulls and bears are in equilibrium. As a trader, you have to wait for this indecision to be resolved one way or the other. A trade has to be initiated on the side which wins this battle. In this case the bulls took control with a gap up. The gap up day was also a Doji. As a candlestick trader, you are looking for confirmation of a signal. A Doji is not a confirmation of another Doji. The day after this second Doji, bulls closed the stock higher with a bullish candle and gave a good long entry point.

Chart courtesy icharts.in