What it means
A candlestick shows four prices for a period, such as a day: the open, the high, the low and the close. The thick part, called the body, spans the open and close, while thin lines called wicks or shadows reach out to the high and low.
On a doji the body is so thin that the candle looks like a cross or a plus sign. The shape tells a short story.
During the period the price may have moved sharply up or down, but by the end it came back to where it started. Neither buyers nor sellers won, which is why analysts describe the market as undecided.
Context matters more than the shape itself. A doji after a long rise may hint that buyers are running out of energy, while one after a long fall may suggest that sellers are tiring.
A doji in the middle of a sideways market means very little. There are several variants.
A long-legged doji has long wicks on both sides and shows a lot of back-and-forth. A dragonfly doji has a long lower wick and its open and close near the high, while a gravestone doji has a long upper wick and its open and close near the low.
Candlestick charting is often traced to Japanese rice traders, and the Japanese name for this pattern has stuck in English. Most traders wait for confirmation, such as the next candle moving clearly in one direction, before acting.
Used alone, the pattern produces many false signals, so it is best combined with trend lines, volume or other indicators. Finance teams that hold shares or run treasury portfolios do not need to trade on patterns like this.
Still, understanding the vocabulary helps when colleagues or advisers refer to charts in meetings.
In practice
Real-world examples.
Example
A trader watching an airline share sees a doji at the top of a long rally. She does not sell straight away, but she tightens her stop-loss and waits to see whether the next candle falls.
Example
An investor follows a currency pair that has been dropping for weeks. A dragonfly doji appears, with the price recovering from its low by the close, and he considers adding a small position if the next day confirms a bounce.
Example
A technical analyst at a brokerage prepares a weekly note. She mentions a doji on the index chart as a sign of hesitation ahead of a central bank announcement, but stresses that fundamentals will decide the next move.
Formula
Calculation
Body size = |closing price - opening price|
Candle range = high price - low price
Body as a share of range = body size / candle range
A common rule of thumb treats a candle as a doji when the body is no more than about 5% to 10% of the range, though traders choose their own threshold.
Worked example: A share opens at $50.00, reaches a high of $52.00, falls to a low of $48.00 and closes at $50.10.
Body size = |$50.10 - $50.00| = $0.10.
Candle range = $52.00 - $48.00 = $4.00.
Body as a share of range = $0.10 / $4.00 = 2.5%.
Because 2.5% is well below the 5% to 10% rule of thumb, this candle qualifies as a doji. The long wicks on both sides show that the price moved a lot but ended almost where it began.Case study
Seen in the real world.
Falconridge Capital is a fictional small investment club that began to use candlestick charts. After reading about doji patterns, several members started selling whenever one appeared.
In this illustrative case, they sold shares in a growing technology company after a doji at a recent high. The next day the price rose strongly and continued upwards for weeks, so the sale proved premature.
The club's treasurer reviewed past trades and found that dojis were followed by reversals only about as often as by continuations. The club now treats a doji as a prompt to watch more closely and waits for confirmation from the following candles and from volume. The illustrative lesson is that a pattern is a clue, not a command.
Watch out
Common mistakes.
- Treating every doji as a reversal signal. Without a clear trend before it and confirmation after it, the pattern says little.
- Ignoring the time frame. A doji on a one-minute chart is far less meaningful than one on a weekly chart.
- Using a strict zero-difference rule. Open and close rarely match exactly, so traders accept a small body relative to the range.
Questions
People also ask.
What does a doji mean?
It means the open and close were nearly equal, showing indecision between buyers and sellers during that period.
How is a doji different from a hammer?
A hammer has a small body with a long lower wick but does not require the open and close to be almost equal.
Should I trade on a doji alone?
Most traders prefer confirmation from the next candle, volume or other indicators, because the pattern alone has a high rate of false signals.
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