A doji is a name for a session in which the candlestick for a security has an open and close that are virtually equal. Doji candlesticks look like a cross, inverted cross or plus sign. In Japanese, "doji" means blunder or mistake.
Technical analysts use tools to help sift through the noise to find the highest probability trades. One tool was developed by a Japanese rice trader named Honma from the town of Sakata in the 18th century. Every candlestick pattern has four sets of data that help to define its shape. Doji are commonly seen in periods of consolidation and can help analysts identify potential price breakouts. Some analysts interpret this as a sign of reversal, but it may also be a time when buyers or sellers are gaining momentum for a continuation trend. From an auction theory perspective, doji represent indecision on the side of both buyers and sellers in a seller-buyer standoff.
A doji candlestick is a neutral indicator that provides little information. There is no assurance the price will continue in the expected direction following the confirmation candle. The size of the doji's tail or wick and confirmation candle can sometimes mean the entry point for a trade is a long way from the stop loss location. Estimating the potential reward of a doji-informed trade can also be difficult. Other techniques, such as other candlesticks patterns, indicators, or strategies are required in order to exit the trade when and if profitable.
Are doji candlestick pattern profitable? Discover it here!
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