What Is a Doji?

What Is a Doji?

Let me explain what a doji is: it's a single candlestick pattern where the open and close prices of a security are the same or very close. You see it on charts as a candle that looks like a cross, inverted cross, or plus sign. As a technical analyst, I use this shape to make assumptions about price behavior. Though rare, especially in clusters, a doji often signals a trend reversal or just indecision about future prices. Remember, candlestick charts overall reveal market trends, sentiment, momentum, and volatility, with patterns like this showing actions and reactions in the market.

Key Takeaways on Doji

You should know that doji are used in technical analysis to spot price patterns in securities. It names a session where open and close are virtually equal, forming that distinct candlestick shape. The term comes from Japanese for 'the same thing.' It's a neutral indicator with little info on its own, rare and not reliable for things like price reversals. The main types are gravestone, long-legged, and dragonfly.

Understanding a Doji

In Japanese, 'doji' means 'the same thing,' highlighting how rare it is for open and close to match exactly. Depending on where the line falls, you get gravestone, long-legged, or dragonfly doji. I believe, like other technical analysts, that all known stock info is in the price, making it efficient—though past performance doesn't guarantee future results, and actual price might not reflect intrinsic value. That's why we use tools to cut through the noise for high-probability trades. This candlestick chart tool came from an 18th-century Japanese rice trader named Honma, introduced to the West in the 1990s by Steve Nison.

Every candlestick has four data points: open, high, low, close, defining its shape for price assumptions. The body is filled or hollow based on whether it closes higher or lower than open, with shadows extending out. A doji happens when open and close are virtually the same, looking like a cross or plus with small or no body. From auction theory, it shows buyer-seller indecision—a standoff where price doesn't move. Some see it as a reversal sign, but it could also mean momentum building for a trend continuation. You'll often spot doji in consolidation periods, helping identify breakouts.

Using a Doji to Predict a Price Reversal

Take this example: a gravestone doji in Cyanotech Corp.'s stock in February 2018 after a high-volume uptrend could indicate a near-term bearish reversal. It might predict a breakdown to close gaps near the 50- or 200-day moving averages at $4.16 and $4.08. You'd check other indicators like RSI or MACD to confirm. For stops, day traders might place one just above the upper shadow at $5.10, while longer-term traders go higher to avoid early exits.

What Is the Difference Between a Doji and a Spinning Top?

Candlestick charts give you info on trends, sentiment, momentum, and volatility, with patterns signaling market actions. Doji and spinning tops both show equal buying and selling pressures, but differ in interpretation. Spinning tops have larger bodies where open and close are close, up to 5% of the candle's range to still be a doji—beyond that, it's a spinning top. A spinning top signals trend weakness but not necessarily reversal. If you spot either, check indicators like Bollinger Bands to see if it's neutrality or reversal. Both often appear in larger patterns like stars, indicating price neutrality alone.

Limitations of a Doji

Alone, a doji is neutral and gives little info. It's not common, so not reliable for spotting reversals, and even when they happen, it's not always dependable. The doji's wick size and confirmation candle can place your trade entry far from stop-loss, meaning you might need to adjust or skip the trade if the risk-reward doesn't work. Estimating rewards is tough since candlesticks don't provide targets—you need other patterns, indicators, or strategies to exit profitably.

Specific Doji Types

A dragonfly doji forms when open, close, and high are equal, signaling potential reversal up or down based on context—it's rare and often shows indecision, so combine with other indicators. A gravestone doji has open, low, and close close together with a long upper shadow, signaling bearish reversal; use it to short or exit longs, but confirm with others. A long-legged doji has long shadows and similar open-close, indicating indecision or consolidation start, possibly leading to a breakout or reversal.

Is a Doji Bullish or Bearish?

Generally, a doji shows indecision where neither bulls nor bears dominate. The dragonfly is bullish at downtrend bottoms, while gravestone is bearish at uptrend peaks.

How Can a Doji Be Used in Cryptocurrency Trading?

Just like with stocks, a doji in crypto signals investor indecision about the asset.

The Bottom Line

A doji occurs when open and close are almost identical—if near low, it's gravestone; near high, dragonfly; middle, long-legged. The name means 'the same thing' in Japanese since open and close match. It suggests no clear direction, showing indecision or uncertainty. Pair it with patterns like harami to spot bullish or bearish turns from indecision.