After looking at the structure and different types of doji candles, let’s now move to equip you with knowledge, as well as tips, on how to trade the doji candlestick patterns.
In the EUR/USD chart below, we take a note of three occasions in which the doji candlesticks are formed. On the top of the chart, we see an uptrend that results in a new high. Previously, there was a series of higher highs and higher lows that created a clean uptrend.
Ultimately, the price creates a long bearish candle, which is followed by a series of ‘neutral’ candles, including a clean doji candle in the middle. We can also classify the other two candles as doji, given that there is almost no body within the candle.
As we noted earlier, doji candlestick patterns signal indecision as the bulls and bears fight over price action control. In this case, the price action rotates lower as doji candles fueled a reversal. Ultimately, the price action creates a deeper pullback.
During this pullback, the price action creates a gravestone doji candlestick pattern. We see a long wick that extends higher, while open and close are almost at the exact same price.
The shape of the candle signals that the bulls have lost the momentum as the price action closes near the bottom despite a push higher. As we said earlier, the gravestone doji candle is a bearish pattern that signals reversal, or in this case, confirms the reversal.
Finally, the third occasion is similar to the first one. The price action has rebounded in the meantime, and an attempt to continue higher has stalled as the bulls lost the momentum again.
After the long bullish candle we have a spinning top candle which sends the same message as doji - indecision. Both buyers and sellers are fighting and no side could gain the upper hand in this fight.
What follows is a doji candle which reaffirms the same message. Looking at the shape of this candle, it can be either classified as a gravestone doji or a long-legged doji, as the upper wick is longer. Nevertheless, the price action ultimately reverses and dives lower to create a new short-term low.
Trading a doji candlestick formation can be tricky as it is considered to be a neutral pattern. In most cases, the price reverses as the current uptrend has lost the momentum, but the doji can still be seen as a continuation pattern as the “neutrality” is seen as a consolidation before another leg in the same direction takes place.