Dojis are one of the most common reversal candlestick patterns.
If you look at your chart and find the places where price reverse, you will often find these Dojis right at the turning point.
However, many people trade it the wrong way.
And if you haven’t been profitable trading these Dojis, then most likely you’re trading it the wrong way too.
In this post, I’m going to get into the details of what these Dojis actually signify…
And more importantly, how to trade them the right way.
What are Dojis?
The Doji is a candlestick pattern where the market opens and closes at the same price.
Sometimes the market doesn’t close exactly where it opened.
It might close a little higher or it might close a little lower, forming small bodies.
As long it has a small body, we consider them Dojis as well.
When a Doji is formed, it is commonly regarded that the market is in a state of indecision because it opens and closes at roughly the same price.
Because after all, if the market opens and closes at the same price, it means the market is indecisive about where it wants to go, right?
Not really.
Why?
Because it depends on where the market has traded in-between the open and close of the candlestick.
So instead of taking what the common consensus is about what the Doji is, we let price action determine that for us.
Psychology of Dojis
Take a look at this Doji below:
As you can see, it looks like a Cross.
This Doji has a long wick at the bottom and a short wick at the top.
So what does this mean?
Let’s examine the price action that formed this Doji candlestick.
Since this Doji has a long wick at the bottom, it means that sometime after the open of the candlestick, the market got pushed down pretty hard.
It shows that the bears were in control for some time during the formation of this Doji.
The market then pushed all the way back up to where it opened and then pushed a bit higher.
Then just at the close of the candlestick, it got pushed back down to where the candlestick opened again.
Here are two possible price movements that formed this Doji candlestick:
In both scenarios, do you think it was the bulls or the bears that had actually demonstrated their strength in this candlestick?
Clearly the bulls right?
Now, I’m not saying that because of this one candlestick the entire market is now bullish and that it will start going up from here.
Instead, what I’m saying is that in just this single candlestick alone, the market has shown bullishness.
And it’s just a possibility that the market might go up from here.
So with this Doji candlestick, it’s not showing that the market is indecisive.
It’s showing that the bulls are in control.
Hence making this Doji a Bullish Doji.
Whether or not the market will go up from here is anybody’s guess.
But we can use the aid of chart patterns to give us an idea of whether the market has a higher probability of going up or down.
With that said, there is only one Doji that is neutral.
And that is a Doji with the same wick length on both sides:
Apart from this Doji, we can classify the other Dojis as either Bullish Dojis or Bearish Dojis.
Bullish Dojis
There are only two types of Bullish Dojis and as long as the open and close is above the halfway mark, we consider it a Bullish Doji.
The first type of Bullish Doji has an open and close in-between the halfway mark and the high.
The second type of Bullish Doji has an open and close right at the high.
The technical name for this Doji is the Dragonfly Doji.
But you don’t need to remember the name.
In fact, you don’t need to remember any candlestick pattern names.
You just need to understand the psychology of the pattern to determine if it’s bullish or bearish.
So if the next time you see a candlestick and you don’t remember its name, don’t worry.
Even I don’t remember every single candlestick name.
This is not an exam.
You’re not going to lose money just because you forgot its name.
And it certainly doesn’t mean you will be profitable just because you remember every single candlestick name.
Bearish Dojis
Now that we know what Bullish Dojis are, the Bearish Dojis are just the opposite:
There are just two types of Bearish Dojis as well.
As long as the market opens and closes below the halfway mark, we consider it a Bearish Doji.
The first type is the Bearish Doji with an open and close in-between the halfway mark and the low.
The second type is the Bearish Doji with an open and close right at the low.
Its technical name is called the Gravestone Doji.
That’s because many people who have traded it are now long gone in their gravestones…
Just kidding.
Alright, now that we know both the Bullish Dojis and Bearish Dojis, let’s get into how you can use them to get into trades.
But before we get into that, you first need to know…
The Wrong Way to Trade Dojis
Many traders, especially newer traders, tend to make a grave mistake when trading these Dojis…
They see a Doji on the chart at either the top or bottom of a trend and then immediately enter into a trade.
Here’s an example of what I mean:
On this chart, the market has been trending upwards very strongly.
And at the top of this move is a Bearish Doji.
Now, this can also be considered a Bearish Pin Bar.
But don’t be caught up by names because whether there is a small body or not doesn’t make any difference to the candlestick.
For this example, I will refer to it as Bearish Doji.
Now, here’s the mistake that many traders make…
On seeing this Bearish Doji, they think that this is a reversal signal and so they go Short.
But right after they go Short, here’s what happens:
As you can see, the market continued to go up very strongly.
And again, there is another Bearish Doji formed at the top of that upward move.
So what do some traders do again?
They go Short again.
And they get stopped out again.
Now, this is where the dangerous mindset of newbie traders come in…
They see another Bearish Doji for the third time and they think to themselves:
“There’s no way the market is going to go up any further. This time it will go down because the market has already gone up so much. I’m going to double my risk and Short the market again. This way I can win back all my losses and more!”
And so they go Short for the third time because the third time’s always a charm, right?
Wrong.
You can see that the market just kept going up and up.
If you had been Short, you would have been stopped out over and over again.
Don’t think that just because a market has gone up a lot that it’s time to go down.
That’s the gambler’s fallacy.
Here’s the definition of the gambler’s fallacy is:
“When an individual erroneously believes that a certain random event is less likely or more likely, given a previous event or a series of events. This line of thinking is incorrect since past events do not change the probability that certain events will occur in the future.”
A good example of this is when gamblers play the Roulette in the casino.
Many gamblers have the erroneous thinking that a red or black number can’t come up over a consecutive number of times.
For example, the gambler might have a strategy that if the red or black number comes out 5 times in a row, he will bet the opposite color.
So if the red number has come out 5 times in a row, the gambler would bet on black the next time.
And if after betting on black, a red number shows up again, the gambler will double his bet and put it on black again.
He will keep doing this until a black finally comes up or until he loses all his money.
Unfortunately, in the long run, he will inevitably lose all his money.
And that is why many people go broke using that strategy in the casino, and the markets.
So here’s the big lesson as it relates to trading:
Don’t go Short or Long just because you see a Bearish Doji or a Bullish Doji.
In fact, never get into a trade just because you see a bearish candlestick or a bullish candlestick pattern.
That’s the surest way to lose all your money.
So how then should you trade the Dojis?
3 Bullish Doji & Bearish Doji Setups
The way you should trade Dojis or any candlestick patterns for that matter is through the context of the market.
That means you want to take into consideration several factors before getting into a trade like…
Is the bigger timeframe in an uptrend or a downtrend?
Are there any support or resistance levels nearby?
Is there a divergence in the market?
Are there any news releases coming up?
Is the chart pattern bullish or bearish?
It’s a combination of these factors that will determine your entry.
So here are 3 ways to get into a trade with the Bullish & Bearish Dojis.
1) Pullbacks
The first way to get into a trade with the Dojis is with a pullback or a retracement.
To get into a pullback trade, what you want to look out for is either a strong uptrend or a strong downtrend.
There are two ways to identify whether a trend is strong or not.
Firstly, it has to be forming wave patterns.
In an uptrend, the market has to be forming higher highs and higher lows like this:
And in a downtrend, the market has to be forming lower lows and lower highs like this:
Secondly, we use two EMAs – the 20 EMA and the 50 EMA.
In an uptrend, we want the 20 EMA to be above the 50 EMA…
And we also want to see the market moving above the 20 EMA.
In a downtrend, we want the 20 EMA to be below the 50 EMA…
And we also want to see the market moving below the 20 EMA.
To get into a trade for pullbacks, we want to only trade in the direction of the trend.
That means if the market is in an uptrend, then we only want to go Long.
And if the market is in a downtrend, then we only want to go Short.
To get into a Long trade in an uptrend, we want a Bullish Doji to form on a pullback to either of the EMAs:
Similarly, to get into a Short trade in a downtrend, we want a Bearish Doji to form on a pullback to either of the EMAs as well:
Let’s take a look at a few chart examples so you know exactly how it looks like on the charts.
The chart above shows the USDJPY 60-minute chart.
The market has just transitioned from an uptrend on the left-hand side of the chart to a downtrend as the 20 EMA crossed below the 50 EMA.
The market started to form lower lows and lower highs as it trades below the 20 EMA.
On the right-hand side of the chart, you can see a Bearish Doji formed on the 20 EMA.
The 20 EMA, in this case, has become a dynamic resistance level for the market.
After Bearish Doji is formed, the market started to go down very strongly.
Here’s an example on the USDJPY chart with a Gravestone Doji:
In the chart above, the market is also in a downtrend and made its first pullback to the 50 EMA.
However, there was no Bearish Doji formed, so there was no trade entry.
The market soon went back down below the 20 EMA and created this long bearish bar.
It then made another pullback to the 20 EMA, and this time, it formed a Gravestone Doji.
From there, the market started to tank.
Now, let’s take a look at an example of a pullback trade on an uptrend.
Here’s a chart example of a pullback trade on an uptrend with a Bullish Doji:
On the left-hand side of the chart, you can see that the market is moving above the 20 EMA making higher highs and higher lows.
Then it made a pullback to the 20 EMA, bounced off it a short distance, but then went back down to the 50 EMA.
The market then formed a Bullish Doji.
If you noticed, I drew a horizontal blue line at the swing low where the market made a pullback to the 20 EMA.
This swing low serves as a support level.
Because of this, the formation of the Bullish Doji is a significant one.
The market broke below the previous swing low, touched the 50 EMA, then went back up to close above the previous swing low.
This shows a confluence here with both the previous swing low and the 50 EMA acting as support.
When there’s confluence, the trade has a higher probability of working out.
After the Bullish Doji is formed, the market started to go up.
As you can see, this is a very simple setup and when traded properly, will have a high probability of working out.
2) Double Bottom & Double Tops
The second way to trade the Dojis is through the Double Bottom and Double Top pattern.
The Double Bottom and Double Top is a reversal chart pattern.
Most of the time, the Double Bottom is found in a downtrend like this:
And the Double Top is found in an uptrend like this:
To enter into a Long trade, we are looking for a Bullish Doji to be formed at the second bottom of the Double Bottom…
And to enter into a Short trade, we are looking for a Bearish Doji to be formed at the second top of the Double Top.
Let’s take a look at some chart examples.
In the chart above, you can see that the market is in an uptrend forming higher highs and higher lows.
It then formed a Double Top and at the second top, there’s a Bearish Doji formed.
To enter into a trade, wait for a close below the low of the Bearish Doji.
Here’s an example of a Double Bottom trade with a Bullish Doji:
In the chart above, the market has been in a strong downtrend as it traded below the 20 EMA.
Then it pulled back to the 50 EMA and then came back down to test the previous swing low.
When the market has been strongly trending below the 20 EMA and then pulls back up to the 50 EMA, it indicates that the downward momentum is weakening.
And when it came back down to test the previous swing low and formed a Bullish Doji, that is a potential Double Bottom forming.
However, we do not enter into a trade yet.
We wait for confirmation with the next candlestick closing above the high of the Bullish Doji.
From there the market started to shoot up.
3) V-Shape Reversals
The third and final way to trade the Dojis is with the V-Top and V-Bottom reversal pattern.
A V-Top is when there is a sharp move up, followed by a sharp move back down.
Conversely, a V-Bottom is when there is a sharp move down, followed by a sharp move back up.
These sharp moves are normally caused by some news releases in the market, or sometimes, a technical breakout.
To go Short, we are looking for the Bearish Doji to form at the V-Top.
And to go Long, we are looking for the Bullish Doji to form at the V-Bottom.
However, we don’t want to just go Long or Short each time we see a Doji at the V-Top or V-Bottom.
Instead, to go Short, we want the V-Top to break a previous swing high, form a Bearish Doji, and then close below the previous swing high level.
And to go Long, we want the V-Bottom to break a previous swing low, form a Bullish Doji, and then close above the previous swing low level.
Let’s take a look at a V-Top trade example.
On the left-hand side of the chart above, there is a previous swing high.
From there, the market went down and then came all the way back up to test the previous swing high.
Upon testing the previous swing high, the market broke above it and then came back down to close below it.
And that formed a Bearish Doji.
This is a sign that the previous swing high has now acted as a resistance level.
From there, the market started to go down forming the V-Top.
Here’s an example of the V-Bottom.
Similar to the V-Top trade example, there is a previous swing low on the left-hand side of the chart.
The market went all the way up, then came back down sharply to test this swing low.
It then broke below that swing low and then came back up to close above it.
This formed our Bullish Doji.
And from that point on, the market continued to go up.
Conclusion
Doji candlesticks just like any other candlestick pattern are just a trigger to enter into a trade.
It is not a trade setup.
Every trade entry must begin with your setup.
Only once you have a setup, then you use candlestick patterns as a confirmation of your trade.
The Bullish Doji and Bearish Doji are two of such candlestick patterns.
But you can use many other candlestick patterns for the setups I’ve shared with you in this post.
Now it is your turn.
Have you had success trading Dojis?
Let me know in the comments below.
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