Doji
Candlefocus EditorDoji candles are considered neutral indicators and provide lesser information, which is why they are rarely used as pivotal points in the market. Despite their rarity and lack of information, doji candles, when spotted, can be useful in making decisions when trading securities. Doji candles come in three major types: Dragonfly, Gravestone, and Long-Legged, each with their own distinct patterns.
The Dragonfly type has a long lower shadow, with a short (or non-existent) upper shadow, resembling a lollipop shape. The open price is equal to the lower shadow and the close equal to the upper shadow. The Dragonfly Doji is considered a strong bullish signal as it shows that buyers were initially in control, but eventually, the bears won the day.
The Gravestone Doji is the exact opposite of the Dragonfly Doji. It has a long upper shadow with a short (or no) lower shadow or taper. The Gravestone Doji shows that the bears were initially in control, but eventually, the bulls won the day. Furthermore, due to its shape, it indicates that the security is close to a potential bottom.
The third type of doji is the Long-Legged Doji. It has very long shadows in both directions, comparable to the average daily range. Open and close prices are the same, but the market was highly volatile between the opening and closing of the period in question. The Long-Legged Doji is a neutral trend reversal, but should be treated with caution since both buyers and sellers are indecisive.
Overall, doji candles are considered weak trend reversal points that should be examined in order to properly interpret the trend change. Although they are rare, they remain a useful tool in technical analysis when trading securities and can be beneficial when combined with other charting techniques.