Candlestick charts combine data from multiple time scales into a single price bar, making it more helpful than standard lines connecting closing prices or open-high and close low bar. Candlesticks create patterns that forecast price direction. Not to mention, color-coding makes this tool look more sophisticated. Traders widely use Japanese candlestick charting techniques to evaluate financial markets. In this piece, we’ll discuss different candlestick charting techniques in detail.
History of Candlesticks Charting
Munehisa Homma, a Japanese rice dealer, introduced the concept of candlesticks charting patterns in the 18th century. Homma noticed that the rice market was impacted by the emotions of merchants while still admitting the demand and supply impact on the prices of rice.
Later on, the western world became familiar with the candlestick charting patterns when Steve Nison used and explained the notion in his book “Japanese Candlestick Charting Techniques” in 1991.
How does the Japanese Candlestick Charting work?
Compared to bar charts, Japanese Candlesticks give more comprehensive and precise price movement data. They show the supply and demand forces that drive price behavior.
The body of each candlestick reflects the price movement between the opening and closing points of underlying securities. While the upper wick indicates price distance from the body’s peak to the trading period’s high, the lower wick shows the price difference between the body’s bottom and the period’s low.
The security’s closing price determines the candlestick’s bullish or bearishness. If a candlestick closes higher than it opened, the body is white. In this scenario, the closing price is at the top while the opening price remains at the bottom.
The body fills up or turns black if the security traded closed lower than it opened. In this case, the body’s bottom is the candle’s closing price, and the top is its opening price. Modern candlesticks include more colors than white and black, such as blue, red, and green. Traders utilizing computerized trading platforms can select different colors for candlestick while setting up charts.
Reliability of Candlesticks Charting Techniques
Not every candlestick pattern works as anticipated. The popularity of candlestick patterns has diminished their dependability due to hedge funds and algorithms analyzing them. These well-funded traders employ lightning-fast execution against individual investors and fund managers who rely upon popular technical analysis tactics.
The five candlestick patterns below generally tend to work well for determining price direction & momentum. Each one interacts with the surrounding price bars to forecast price changes. Not to mention, these candlestick patterns are time-sensitive in a way that they only function inside the chart’s parameters (for instance, daily, weekly, or monthly), and their effectiveness rapidly diminishes 3 – 5 bars following the pattern.
Performance of Candlestick Patterns
This research is based on Thomas Bulkowski’s 2008 book “Encyclopedia of Candlestick Charts,” which ranked the performance of candlestick patterns. He provides stats for two predicted pattern outcomes, including reversal and continuation. While reversal candlestick patterns indicate a price shift, continuation patterns imply price extension.
The examples below show the empty white candlestick represents a higher closing print than the black candlestick.
Three black candles form a bullish three-line strike reversal pattern. Each bar closes near the Intrabars low, posting lower lows. However, the fourth bar reverses widely and closes above the series’ high. The opening point also prints the fourth bar’s low. It anticipates increased pricing with up to 83% confirmation, according to Bulkowski.
Image Source: Candlescanner.com
Three black bars close around the Intrabars lows in an upswing, forming a bearish three-black crows reversal pattern. This pattern implies further declines, possibly sparking a broader-scale slump. The most bearish variant starts at a fresh high (A on the chart), trapping purchasers into momentum trades. Bulkowski claims this pattern accurately forecasts decreased pricing 78% of the time.
Image Source: Candlescanner.com
The two-black bearish continuation pattern forms after a noteworthy peak in an upswing, with a gap-down resulting in two black bars reporting lower lows. The pattern implies further declines, possibly sparking a wider-scale slump. Bulkowski claims this pattern accurately forecasts decreased prices with an accuracy of 68%.
Image Source: Candlescanner.com
In a downtrend, the black candles series prints lower lows before the emergence of the bullish abandoned baby reversal pattern. For Doji candlesticks having a small range, the market’s gap lowers on the next bar, but no new sellers appear. The pattern gets completed by adding the third bar and anticipates further gains, maybe sparking a larger-scale upswing. This pattern has a 49.73% accuracy rate, as per Bulkowski.
Image Source: Candlescanner.com
The evening-star bearish reversal pattern initiates with a towering white bar leading an upswing to new highs. This results in a tight range candlestick as the market gaps soar, but no new buyers materialize. On the 3rd bar, the pattern gets completed following a gap down, implying further declines and maybe a more considerable slump. Bulkowski claims this pattern accurately forecasts price declines by 72%.
Image Source: Candlescanner.com
Difference between Candlesticks Patterns and Bar Charts
The link between opening and closing price is displayed in candlestick charts by the body color, but it is shown by horizontal lines protruding from the vertical in bar charts.
The bar chart emphasizes the stock’s closing price relative to the prior period’s closure, while the candlestick variant emphasizes the close concerning the same day’s opening.
Traders can get the same information using Japanese candlesticks or bar charts. However, candlesticks are more visible, giving traders a better idea of price activity. They also show the dynamics (supply & demand) affecting price fluctuation over time. The upper and lower wicks of the candle’s body are called the shadows. The body length and shadows of the candlestick are crucial price indicators.
Candlestick patterns attract traders’ attention, but many of their continuation and reversal signals are unreliable in today’s computerized market. Based on Thomas Bulkowski’s data, a small number of these patterns provide traders with actionable sell and buy recommendations. Therefore, traders must learn to distinguish between profitable and unprofitable patterns.
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It is crucial to use effective chart patterns in technical analysis. Almost all levels of traders employ different chart patterns to identify market trends and anticipate market moves. Whether you trade the stock market or try your fate in forex, charting patterns have always had its place in the traders’ tool belt. This piece discusses one of the most popular charting patterns called Bull Flag in detail.
What Is Bull Flag?
A bull flag is a chart pattern that signals an entry into an uptrend. Many professionals adopt this pattern to flow with the trend. The bull flag pattern helps you participate in the present market trend. That implies you may use the data to find entry points where the risk is low compared to the potential gain. Visually, this pattern displays a solid upward movement (the pole) followed by a flag-shaped consolidation.
The flag is commonly a horizontal rectangle and is sometimes seen with a slant formation. Another variant is the bullish pennant, which involves consolidating a symmetrical triangle.
The psychology behind the pattern holds more significance than the flag’s appearance. Despite a robust vertical rebound, the stock refuses to fall much as bulls grab any available shares. That’s generally followed by a forceful upward rise, measuring the previous flag pole’s length. These chart patterns are called bear flags and pennants when used in reverse. Bull flags generally appear during a new market rally.
Flag patterns include five essential characteristics:
The preceding trend
Bullish Flag Examples
Let’s use price charts to understand the bullish flag concept and visual appearance.
Emerging Bull Flag
A breaking out flag is a good example of an emerging bullish flag. However, the overall pattern is more important than the fact that the flag doesn’t make a perfect rectangle. It rises sharply to create the flagpole, then settles firmly. Bulls don’t seem to be waiting for better pricing.
We can calculate the bull flag target by projecting the flag pole’s length from the breakout point. That’s how we get the target price of roughly $9.50.
Image Source: StockCharts.com
Rectangular Bull flag
Below is a pricing chart for America Service Group Inc. Also, the candles’ lengthy lower tails show definite purchasing every time it drops below $10. Volume has increased during the last two sessions. The volume pattern is a frequent feature of bull flags.
Volume usually spikes as the stock develops the flagpole. A pricing consolidation causes a drop in volume. Volume often increases somewhat when the bull flag is broken, but not drastically.
Image Source: StockCharts.com
The price chart of Cantel Medical Corp. looks to have broken out of a bull flag formation. CMN closed over the flag’s top near $15. While CMN may resume its parabolic advance, it is common for a stock to retest the breakout point after a few sessions, allowing for a second entrance.
Stop-loss protection for this sort of trade is flexible. For example, long-term traders frequently employ stop levels beneath the entire flag, while others use two-bar stops.
Image Source: StockCharts.com
Tight Bull Flag
The price chart of CF International Inc. shows a very tight bull flag. The tighter flags often perform better and have more manageable stop-loss levels.
Bull flags usually clear out in three weeks. More extended periods form a triangle or rectangle.
Following a consolidation week, ICFI pushes over the resistance region at $24.50, fitting the usual trend and pointing to a possible rally.
Image Source: StockCharts.com
Difference between Flag & Pennant
Flag chart designs resemble pennant patterns at first glance. Both flag patterns occur after a substantial price movement followed by a horizontal price movement. They usually last 1-3 weeks. However, there are various discrepancies among the similarities.
Pennants are usually triangular. Converging trend lines form them by successive highs and lows. It’s consolidated in a pennant shape, with sinking resistance & rising support. Generally, it would help be best to utilize pennants as part of confirmation along with other technical indications. Using the RSI (Relative Strength Index) to moderate during consolidation and attain oversold levels can be viable.
A flag pattern occurs when a substantial spike (or decline) is followed by a tight price range (or fall). A flag usually helps a candle close above a support or resistance level.
To trade successfully with flags or pennants, you should always use volume to determine your entry and exit locations. It will help you confirm breakouts and allow you to speculate on the following momentum.
Finally, there is no time lined defined for the pattern formation. Hence, waiting for the right time is all you can do.
How to Identify a Bull Flag Chart
The flag pattern looks rectangular; hence it might be difficult for new traders to spot it. Therefore, the need to be careful while identifying the bull flag pattern. Below are some tips to help you Identify the bull flag pattern quickly.
Step 1: The bull flag should have an uptrend since it’s a continuation pattern and isn’t a reversal.
Step 2: When the correction begins and the price drops. You may say it’s a bull flag.
Step 3:The retracement should not be less than 38%, and it’s not a bull flag even if it is below 50%.
Step 4: Draw lines parallel to the pattern.
Step 5: The underlying security price should surpass the pattern’s upper border.
How to Trade The Bull Flag?
After identifying the flag pattern, you should enter a position when the downtrend loses momentum.
A Long Entry
In this case, the long entry is at the flag’s break, while the stop level is below the flag’s consolidation. Keep previous swing high as your primary objective. A strong market trend would make the price continue moving in the same direction.
Trade management differs. It depends on each trader’s style. Still, closing a position around the previous swing high could be a sensible move. You can then define a trailing stop based on trend line or moving average.
Below is an example of a BTCUSD weekly chart showing how to detect and trade a bull flag.
1) As stated previously, the dominant trend must be positive. This momentum is frequently framed by a series of bullish bars with slight correction.
The picture below shows significant directional movement with just minor retracements.
2) We must await consolidation. In this situation, a downtrend channel may be created once a lower high is reached, and we can prepare for a flag break.
The price breaks the flag, triggering the long entry. You may set a stop loss on the other side of the flag’s pattern.
The red region shows the possible risk (loss), while the green area reflects the potential reward (gain).
Activating the entry is followed by a waiting period. In this case, the price jumps to the last swing high.
Traders need to manage their trades based on their risk appetite. You can close a portion of your position near the target region and keep the rest open.
You can also project the price range of the flagpole upwards and close the entire trade. The price may continue rising to new highs.
Pros and Cons of Bull Flag
The bull flag has the following pros and cons.
Traders may find it while trading any market, including forex, stocks, indices, cryptocurrencies, etc.
There is no specific timeframe to spot the bull flag. Instead, you may find it on any period, such as M1, H1, W1, and MN.
It helps clients find an optimal entry-level
It provides uptrend continuation signals to clients.
Newbies might find it challenging to interpret.
It doesn’t frequently appear on charts.
It might become difficult for traders to distinguish between Bull flags and rectangular patterns.
It may produce false signals sometimes.
No chart pattern or indicator can offer absolute assurance concerning whether a trend will reverse or continue. Therefore, it’s best to use this if it fits your strategy, then follow your trading plan and let probability play out. If you’re looking to learn more about indicators, candlestick patterns, etc. do check out the Traders Central Academy.
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When the market appears strongly bullish, a segment of traders may anticipate a trend reversal, and choose to sell. On the other hand, some may prefer to watch the market during an indecision phase and forecast market developments based on technical analysis. Primarily, it is through specific candlestick patterns formed on charts, that technical traders base their decisions off of. Doji candlesticks is one such candlestick pattern. While there are different types of Doji candlestick patterns, we’ll discuss the Doji Star in detail in this article.
What Is Doji Star?
A Doji Star is a three-column candlestick pattern that indicates a possible market trend reversal. Usually, traders find it in bullish and bearish variants depending upon the prevailing trend. To comprehend the Doji Star pattern, one must first understand the Doji candlestick pattern.
A Doji appears when a candle’s starting and closing prices are almost identical. Doji has a body that resembles a cross or a plus sign. In auction theory, Doji signifies buying and selling uncertainty. Some technical analysts interpret Doji as a retracement. However, this is when buyers and sellers acquire momentum for future trends. When they arise during the integration phase, Dojis can assist analysts in spotting price breakouts.
Technical Analysis – Doji Star
Technical analysis is the study of chart patterns & price movements to predict future price changes. While analyzing Doji candles, traders seek answers to the following questions:
What is the current situation on the price chart before the appearance of Dojis?
Is the price trending upward or reversing in an uptrend (a pullback)?
They may also try to figure out if the price is going in a triangle or sideways? Lastly, technical analysts might wish to confirm a support or resistance level near the Doji pattern?
These scenarios help analysts predict an instrument’s price movement after a Doji. In addition, technical analysis help traders to identify trade opportunities in Doji candlestick patterns. Let’s look at different types of Doji Star and discuss some trading ideas.
Types of Star Doji Candlestick Patterns
There are two Doji Star candlestick patterns, including bullish Doji Star and bearish Doji Star.
Bullish Doji Star candlestick pattern
Bullish Star Doji comprises a three-bar downtrend formation pattern. The first bar is long and dark, while the second is relatively shorter, replicating a Doji with a narrow trading range. Its third bar closes above the middle.
Bullish Star Doji candlesticks indicate a market reversal from the present downturn and are considered purchase indications. Traders use them to track the time to hold their positions. It typically forms at a chart’s bottom, signalling the end of a protracted bearish period.
Bearish Doji Star candlestick pattern
Bearish Star Doji candlestick appears during an upswing. It’s a bearish reversal pattern, and two candles depict it. The first candle’s body is lengthy because of the rise during an uptrend. Doji opening and closing above the first candle appears afterwards.
How to spot a bullish Doji Star?
Look for a standard red candlestick at the chart’s bottom on the first day. It verifies the general downward trend and shows that the price closed below the opening price. A little Doji on the following day means there is little or no gap between the price where the candle opened and closed. Next, look for a gap-up on the third candlestick.
The chart below for Brent Crude Oil (WTI) shows two bullish stars forming following a price dip. The price gap is narrow, creating a star before rising again, confirming a bearish price reversal.
How to spot a bearish Doji Star?
Identifying a bearish Star Doji isn’t tricky. The first candle should have a lengthy white line and a Doji above it. Remember, Doji’s shadow won’t have excessive length, and the line’s shadow does not overlap.
Following a price gain, a bearish star Doji signalled the commencement of a short-term downslide in the given below chart for the U.S SPX 500 index.
How to trade a bullish Doji Star?
Consider entering a long trade with a stop loss to protect yourself if prices start moving in the opposite direction. You may also examine the 5 and 15 minute time frames to study the trend and adjust your protection. Prices begin to rise when the bullish Doji Star pattern forms. So, if you trade after this pattern is confirmed, you can make some potential profit.
How to trade a bearish Doji Star?
A bearish Doji Star signals the conclusion of an uptrend and the beginning of a downtrend. Therefore, when you spot a bearish Doji Star pattern, it is better to shorten your position right away.
Limitations of Doji
The Doji candle is a non-directional indicator that gives minimal data. Since Dojis are rare, they can’t reliably identify price reversals. After the candle is validated, the price may not move in the predicted direction.
Dojis tail or wick combined with the confirmation candle’s magnitude might indicate a trade entry location distant from the stop loss. Traders must locate another stop-loss position or exit the trade if the stop-loss is too far.
Calculating prospective Doji trading gains also becomes challenging since candlestick patterns seldom indicate price goals. Therefore other candlestick patterns, technical indicators, or tactics in conjunction with Doji can help you exit the trade profitably.
Assuming you have learned how to read market trends, structure, technical and fundamental data; using Doji star candlesticks patterns will be a nice addition to your toolbelt. First, however, do not forget to employ Doji Star candlestick patterns with other indicators. Relying solely on Doji star candles might not be a great idea. It’s always best to develop a strategy with a positive edge in the markets and use these patterns or indicators as confirmations for entry. Backtesting on past data is always the best way to do it and later on you can also try your strategy in live markets to validate it.
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Frequently Asked Questions (FAQs)?
What does a Doji tell you?
A Doji candlestick emerges when an underlying security’s opening and closing prices are almost equal and often signifies a reversal pattern. Doji means error or mistake in Japanese and refers to the rarity of the open and closing price being the same.
How to read Doji?
Doji patterns have two lines, one vertical and one horizontal. Length of wick might vary depending on price action. The body indicates the difference between the closing and opening prices.
What does a bullish Doji Star mean?
The Doji Star Bullish Candlestick Pattern is employed in technical analysis to determine when a protracted decline will reverse. It refers to the unusual phenomenon of a security’s opening and closing prices being almost identical.
What does a bearish Doji Star mean?
A Bearish Doji Star candlestick pattern implies that buyers are losing power, and the market is in a bind in an upswing.
Candlestick is the frequent term you encounter while trading stocks or forex. A candlestick chart shows an underlying asset’s open & close prices, the high & low for a timeframe (i.e. minute, hour, day, month). While performing technical analysis might require a strong understanding of multiple candlestick patterns, Doji patterns are common. The Long-legged Doji is also one of them. In this piece, let’s discuss the long-legged Doji candlestick pattern and how to trade it.
What Is Long-Legged Doji?
The long-legged doji is a candlestick with long upper and lower shadows and a small body. It is one of the four doji stick candles, including neutral, gravestone, dragonfly and long-legged. All these candles have one thing in common – their tiny body. When a candle opens and closes almost on the same level, it makes a small body known as Doji.
What Does Long-Legged Doji Indicate?
The pattern shows indecision and is most notable after a sharp rise or fall. In other terms, a long-legged Doji indicates uncertainty about the security’s price direction. If price forms a long-legged Doji before breaking out into a new trend, it may signify that the consolidation phase has begun.
Long-legged Doji holds critical significance when they occur amidst a strong up or downtrend. With supply and demand nearing equilibrium, a trend reversal is possible. Because the price has reached equilibrium or indecision, it does not move in the same direction, while the market sentiment may change.
The price is pushed higher and closed above the opening for most periods in an uptrend. Unlike previous periods when buyers were in charge, the long-legged Doji shows a battle between buyers and sellers that ended in a tie. Not to mention, the pattern appears in all time frames but is more significant in longer-term charts where more participants contribute.
Examples of Long-legged Doji
The chart below shows some long-legged dojis in a daily chart.
On the left, the price falls and forms a Doji. After then the price consolidates and rises but fails to gain traction and falls again. Since the price falls, the long-legged Doji appears, leading to the beginning of the consolidation period once again. The price rises above the consolidation. However, the long-legged Doji foreshadowed the market’s consolidation or indecision before the upward reversal.
On the right side, the price falls. Later, the long-legged Doji forms, dropping below the consolidation low before rallying to close within the consolidation and then rose. Notably, this time the body of the Doji appears slightly significant than the previous ones.
How to Identify Long-legged Doji?
You can follow the instructions below to locate the long-legged Doji candlestick on a price chart.
Ensure that the Doji candlestick’s beginning and closing prices are the same.
Doji candlesticks should have extended higher and lower shadows.
The size of the lower and upper shadows should be roughly equal.
Long-legged Doji in Uptrend
When the bearish Long Legged Doji has long shadows on both ends in an uptrend, it suggests buyers and sellers are indecisive, leading to a bearish reversal. In such a scenario, the market is bullish and trending upwards. Then a Long Leg Doji appears, bucking the trend.
Long-legged Doji in Downtrend
Like uptrend, long-legged Doji has very long shadows on both sides in a downtrend as well. Since buyers and sellers are indecisive, it indicates a bullish reversal. This pattern depicts a bearish market in a downtrend. Then a Long Legged Doji appears and gaps the trend. Not to mention, the next day’s trend must reverse to confirm this pattern.
Trading the Long-legged Doji
How to trade long-legged Doji?
While there are different methods to trade the long-legged Doji, entering positions based on it isn’t necessary. Given that the price moves a little on a closing basis, some traders believe that one candle pattern isn’t significant enough to warrant a trade decision.
On the other hand, some traders prefer to wait until the price moves after the appearance of the long-legged Doji. Notably, long-legged Doji can form a significant consolidation or appear in clusters. The previous trend may be reversed or continued depending on how the price breaks the coalition.
Initiating a Long-legged Doji Trade
Before entering a position, you could wait until the price moves above the long-legged Doji’s high or low. If the price rises, then go long. On the other hand, if the price falls below the pattern, go short. Alternatively, you can wait for a consolidation to form around the long-legged doji before going long or short. The long-legged Doji pattern is more likely to be valid if it appears near a major resistance or support.
Let us share some other methods to trade Long-legged Doji below.
Moving Average: The appearance of the long-legged Doji piercing the moving average after you apply a 50 or 200-day moving average is a positive indicator that price could break or rebound through the moving average.
Bollinger bands piercing: You can also trade the long-legged Doji with Bollinger bands. In this case, the Dojis tend to break through the Bollinger bands (Upper or Lower), indicating a reversal if a candlestick closes in the other direction. Not to mention, you must consider the width of Bollinger bands before trading them.
Support & Resistance: This candlestick pattern often appears at important support and resistance levels, indicating price decline. Eventually, the price tested support and resistance but couldn’t close higher. Therefore, if the following candlestick pattern forms, you could expect a support or resistance level reversal.
Long-legged Doji – Other Considerations
Long-legged Dojis have no profit targets attached, so traders must devise a way for doing so. For example, you could use technical indicators or exit based on the best exit points in your backtest. Using a fixed risk/reward ratio which worked well in testing, could also help keep things simple and efficient.
Risk management is essential when trading long-legged Doji or any other technical indicator. Besides carefully defining a risk-reward ratio, using a stop-loss is also vital. Since long-legged Doji can also lead to false information, a tight stop loss would help reduce risk. Place a stop loss below the long-legged doji or consolidation if going long. On the other hand, put your stop loss above the long-legged doji or consolidation if you’re going short.
A long-legged Doji candlestick represents indecision and signals market uncertainty. Its occurrence in price behaviour can indicate a variety of factors. Possibly, it could indicate a price reversal from the preceding trend. On the other hand, it could also mean that the market consolidates before breaking out in the prevailing trend’s direction. As a result, the long-legged Doji candlestick should never be evaluated in isolation but rather in conjunction with all other elements of your strategy.
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Understanding candlestick patterns is critical in technical analysis, and there are over 30 candlestick patterns. However, Doji candlestick patterns are the most common. While Doji Candlestick patterns can help traders make informed decisions, they can sometimes lead to false information. This piece will explain the Dragonfly Doji candlestick pattern, its components, how to trade it, and its limitations.
What Is Dragonfly Doji?
The Dragonfly Doji is a bullish reversal candlestick pattern usually formed at the lows of downtrends. Besides enabling traders to see support and demand, it can help investors detect an uptrend when coupled with other indicators. The Dragonfly Doji candlestick appears when the open, high, and closing prices become almost identical. The Dragonfly’s long lower shadow reflects that aggressive selling occurred during the underlying time that buyers counterfeited as the price closed near its origin.
What Does Dragonfly Doji Indicate?
After a downtrend, the Dragonfly Doji candlestick indicates that the price may rise. On the other side, the uptrend anticipates more sellers entering the market. Therefore the price could decline.
In either case, the candle that follows the Dragonfly Doji must confirm the market direction. The Dragonfly’s long lower shadow suggests that sellers had control for part of a price advance. While the price remained unchanged, the increase in selling pressure triggers a warning sign that the price trend might change. The candle appearing after a bearish dragonfly must confirm the reversal as it closes below the dragonfly candle. The reversal signal is invalidated if the price tends to rise on the confirmation candle.
Using Dragonfly Doji in conjunction with other indicators is best, as the candlestick patterns can indicate both indecision and reversal. Unreliability is associated with low volume Dragonfly Dojis. The confirmation candle should have a high price and significant volume.
Another possibility is that the Dragonfly Doji appears at the end of a head and shoulders chart pattern. Anyhow, traders should not entirely depend on a single candlestick pattern in any case.
Dragonfly Doji Examples
Since it is rare for a candle to have open, close and high prices to be almost in the same area, Dragonfly Dojis are not very common. Usually, all three prices do have minor differences. For instance, given below is an example of a Dragonfly Doji appearing in the sideways of a long-term uptrend. As the Dragonfly Doji moved lower, buyers quickly swept it higher.
The price moved higher after the Dragonfly Doji appeared, confirming the price retracement. Traders usually buy or sell their positions after the appearance of the confirmation candle.
Traders can witness the Candlesticks’ versatility as a slight drop in the price followed by a push higher confirmed the price was likely to rise further. Not to mention, the dragonfly pattern and the confirmation candle signaled the end of the short-term correction and the start of the uptrend.
This candlestick pattern implies different meanings when it appears in an uptrend or downtrend. Let’s discuss it below.
Dragonfly Doji in Uptrend
In a bullish trend, Doji candles always signal danger. A Dragonfly Doji candle appearing in an uptrend shows uncertainty in the market. It indicates a 50% price reversal or range before continuing upward movement. The next candlestick on every chart should confirm the Dragonfly Doji candle price action.
In the image below, a daily bearish Dragonfly Doji indicates a price reversal.
A bullish Dragonfly Doji followed a bearish one on a daily chart and prevented the price from falling. As a result of the candles’ strengthening, the price kept rising.
Dragonfly Doji in Downtrend
The downward trending candlestick is defended and pushed up by bulls to close almost precisely on the opening price. Thus, a Dragonfly Doji candle can signal price exhaustion and reversal. Also, it is pertinent to note the point when the candle appears since its formation near support could be a specific support level such as Fibonacci level, moving average line, historical support level, or Bollinger Bands lower band.
As seen in the image below, a daily bullish Dragonfly Doji showed a price retracement before continuing to fall.
A daily Bearish Dragonfly Doji formed below the support line, but the price did not retrace.
Trading the Dragonfly Doji
How to Trade a Dragonfly Doji?
As discussed above, It is rare for Dragonfly Doji to appear on charts. Therefore, it is comparatively difficult to open or close positions based on Dragonfly Doji candles. There is always a risk that traders might get confused while identifying the Dragonfly Doji. Mixing it up with a hammer candle or hanging man candle can lead investors to false interpretation. A T-shaped candle having a small body indicates that the price dropped below the opening price but closed on the same level after reverting.
Confirmation of Dragonfly Doji
Paying close attention to the candle appearing next to the Dragonfly Doji is crucial. For instance, a hanging man candle in an uptrend offers a high probability of reversing the price trend. However, be cautious since the price reversal pattern can also be false positives when appearing in higher time frames.
Upon reaching a resistance level, the formation of the Dragonfly Doji might indicate a temporary price reversal, but you should check it with further price action for confirmation.
Initiating a Dragonfly Doji Trade
Entering a position based on Dragonfly Doji carries increased risk since it signals the market’s uncertainty. Therefore, you must not forget to incorporate stop-loss while initiating a trade and open a position only after the appearance of the confirmation candle.
Difference Between Dragonfly Doji and Gravestone Doji
There is no difference between the practical implication of Dragonfly Doji and Gravestone Doji, as both suggest price trend reversals followed by confirmation candles. However, they look like opposite of each other. Dragonfly Doji is T-shaped with a long lower shadow, while Gravestone Doji appears as an inverted T with a long upper tail.
Limitations of Dragonfly Doji
Initiating trades based on Dragonfly Doji can be tricky since it only appears occasionally. Also, there is no assurance the market might move in the anticipated direction even after the appearance of a Dragonfly Dogi and the confirmation candle. Hence, relying on a less common technical indicator for spotting price trend reversal isn’t worth it.
Because of the magnitude of the Dragonfly Doji and the confirmation candle’s size, the entry position for a trade can be a long way from the stop-loss. It implies traders will either need to relocate their stop loss or abandon the trade position because a large stop-loss is less likely to justify the potential gain.
Secondly, you can’t estimate the potential gain reliably since Dragonfly Doji doesn’t help you define price targets. However, it will help incorporate other technical indicators and candlestick patterns while profitably exiting a trade.
Doji patterns imply a price transition or the market’s uncertainty about the future direction of pricing. Instead of a continuation or reversal pattern, these patterns are better classified as transitional candlestick patterns as a whole. Specific patterns, such as the Gravestone Doji or the Dragonfly Doji, indicate a potential price reversal, but they work best with other technical indicators.
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Candlestick patterns hold critical importance in technical analysis, and understanding them well is crucial. While there are more than 30 candlestick patterns, Doji candlestick patterns are known to be used more frequently. However, traders usually struggle to employ them effectively either due to lack of knowledge or misinterpretation. In this guide, we’ll discuss one of the popular candlestick patterns – Gravestone Doji. Besides helping you know how it works, we’ll also explain how to interpret it. At last, we’ll also discuss some limitations of the Gravestone Doji pattern.
What Is Gravestone Doji?
Gravestone Doji is a bearish pattern that indicates a price reversal and a subsequent downtrend. It alerts traders to book a profit on the bullish positions before the trend turns bearish. The pattern forms when the underlying asset’s opening and closing price becomes equal. It has a long shadow on the upper side that indicates sellers resisted the day’s buying pressure and that supply and demand are in equilibrium.
What does a Gravestone Doji indicate?
A Gravestone Doji pattern indicates the bearish reversal. The pattern does not necessarily need opening, closing, or low prices to be the same for its validation. However, Gravestone Doji’s small tail help traders not to confuse it with other patterns like the inverted hammer, spinning top, or shooting star. The market portrays that the bulls push the prices to go higher, while bears keep pulling the prices back to the origin.
Gravestone Doji’s upper long shadow implies the bulls are becoming weak. Not to mention, the Gravestone Doji can appear near a downtrend end, but it is more common in an uptrend. Despite being famous, the Gravestone Doji comes with reliability concerns as it is common with other visual patterns as well. Traders often ignore Gravestone Dojis until the confirmation candle shows up and signals a reversal.
Gravestone Doji examples
Gravestone Doji can appear in both uptrend and downtrend. Let us explain either case using a simple example.
Gravestone Doji in Uptrend
Gravestone Doji is more likely to be formed in an Uptrend top. When it appears in an uptrend, it is considered unfavorable for the bullish market. That’s because it suggests the bulls are becoming weaker, and the bears are likely to come into play who will start pulling the price downward. Ideally, when a Gravestone Doji appears at the top of an uptrend, you should get ready to exit a trade before it is too late and the bears take control.
Gravestone Doji in Downtrend
Whether a Gravestone Doji appears in an uptrend or downtrend, it is always a bearish candlestick pattern. Therefore, you must not get confused. The appearance of a Gravestone Doji in a downtrend suggests that a trend might continue or move sideways and market range. Remember, a Gravestone Doji in a downtrend shouldn’t be considered a bottom confirmation since the market may continue descending further.
Trading the Gravestone Doji
How to trade Gravestone Doji?
Always consider trading Gravestone Doji for some confluent reasons. Although candlestick analysis is a powerful tool for effective trading, it works best when combined with other indicators, such as Fibonacci levels, moving averages, horizontal support and resistance, momentum analysis with RSI, MACD, and CMF, etc.
After identifying a Gravestone Doji, wait for the confirmation candle and the low of Gravestone Doji to break down. The simple method to trade Gravestone Doji is to enter a short-term position. Remember, you should initiate a trade only when the low of Gravestone Doji breaks since if it keeps holding there, the market might start rising further.
Managing risk while trading with Gravestone Doji
Do not forget to place a stop loss while entering a position based on Gravestone Doji. It will help you limit your loss if the market moves against you. It is best to place a stop loss a little higher than the shadow of the Gravestone Doji. Not to mention, your risk levels may vary depending upon the wick size of the Gravestone Doji. It could either be too small or too large for you to be comfortable.
Essentially, placing a tight stop-loss could get caught by stop hunters, while a stop-loss set too far brings more risk. Therefore, you can use volume profiling to identify the appropriate stop-loss point.
Setting up target profits while trading with Gravestone Doji
While appropriate timing holds critical importance for trade placement, you are less likely to be profitable if you miss an exit plan for your positions.
When trading with Gravestone Doji, it is best to use the candle wick to exit a position. Your first target profit should be equal to the size of the Gravestone Doji candle, while you can have it double the size of the candle for the second take profit.
Drawing Fibonacci levels to match the appropriate potential spot or incorporating support and resistance levels can also help. Moreover, you can employ other methods like TD sequential or Elliott wave and use their exit points in conjunction with the Gravestone Doji to have the best results.
Setting up a Stop loss on Continuing Trades
There could be a scenario where the market seems to be moving well in your favor, and you wish to switch from scalping to a long-term position. In such a case, you need to recalculate your stop level and place it a little lower or higher than your current stop level so you can avoid losing profits. However, modifying a stop-loss in continuing trade is not recommended. It can have serious consequences in highly volatile markets like cryptocurrency. If you are new to trading, it’s better not to think about it.
Difference between Gravestone Doji & Dragonfly Doji
Dragonfly Doji is the inverse of Gravestone Doji. Despite their differences, they have a common mechanism. An almost-identical closing, opening, or high of a trading session creates a Doji. While Gravestone Doji looks like an inverted T, the Dragonfly Dogi looks similar to a “T.”
Both can be bullish or bearish, but they can also be the opposite. A bullish dragonfly can precede an upswing, whereas a Gravestone Doji can precede a downturn. Both patterns necessitate volume and a second candle. Instead of pure bearish or bullish signals, you should consider both formations as visually uncertain representations.
Double Gravestone Doji
The appearance of a double Gravestone Doji indicates that bulls are significantly weak, and the market is turning bearish. After a low of two Gravestone Doji breaks, the market descends abruptly. However, instead of entirely depending on the Gravestone Doji, you should consider using other indicators such as RSI, MACD, Bollinger bands, Fibonacci levels, and Moving Averages, etc., in conjunction with the Double Gravestone Doji. It will help you decide more precisely whether to exit a trade in anticipation of a bearish market ahead or wait for bulls to retreat. Not to mention, the significance of the confirmation candle can’t be overlooked either.
Characteristics of the Gravestone Doji
Gravestone Doji pattern is one of four Doji candlestick patterns, including Common Doji, Gravestone Doji, Dragonfly Doji, and Long-Legged Doji. Being visually different from other candlestick patterns, it is easily identifiable.
Gravestone Doji’s most distinguishing characteristic is the long upper and lower wick with a tiny candle’s body that looks representing the open and closing prices being almost the same.
When a Gravestone Doji appears at the end of a strong uptrend, it becomes compelling. Generally, you may notice intense price action bursts pushing the price of underlying security into the uptrend. These uptrends are likely to have no pullbacks.
The Gravestone Doji suggests a temporary pause or even a possible reversal if such a trend appears. Undoubtedly, the emergence of a Gravestone Doji near a rally’s top-end or close to a resistance level makes it more viable. Not to mention, the Gravestone Doji can appear in either case.
Significance of Gravestone Doji’s Location
Remember, the location of the formation of Gravestone Doji is critically essential. A Gravestone Doji appearing on a dominant resistance level is far more significant than the pattern emerging on the chart anywhere else. Therefore you should avoid trading Gravestone Doji unless it appears in the position mentioned above. For instance, amongst the two Gravestone Doji appearing in the image shared below, the 2nd Gravestone Doji holds more significance since it forms on precise resistance levels. On the other hand, the Gravestone Doji appearing in the middle of the chart doesn’t make any sense. Hence, if you had to place a sell trade, you would have certainly put it near the second Gravestone Doji.
How to Trade Gravestone Doji In a Range Market?
Since possible selling pressure comes around a resistance level, you should short your position. That’s because the market signals the rejection of higher prices and indicates a lower reversal, just like shown in the image below.
How to Trade Gravestone Doji In a Trending Market?
The market usually bounces off in a healthy or strong trending market. Therefore, you should consider going short when the price of an underlying asset pulls back towards the Moving Average forming a Gravestone Doji, as you can see in the attached image.
Gravestone Doji – Limitations
Gravestone Doji candlestick in an uptrend may signal the end of a bullish phase and the beginning of bearish forces. It can help traders to plan for getting out of trades with profit. However, it doesn’t necessarily mean that a trend has changed. Traders must wait for the next candle to form before making a move. It can easily represent market indecision, and then the market can rise. The Gravestone Doji works best when combined with other technical indicators.
Pros and Cons of Gravestone Doji
Given below are some pros and cons of employing Gravestone Doji;
Gravestone Doji is easily identifiable.
It is one of the powerful bearish reversal candlestick patterns.
Traders can use it in conjunction with other indicators.
It can form a mid-trend becoming least helpful.
It usually does not appear in high time frames.
It shows the market fluctuations and could continue the trend or get a reversal.
Let’s review how you can identify and trade the Gravestone Doji using quick bullet points:
1) An upward trending Gravestone Doji pattern usually occurs at the bullish trend’s peak.
2) The bulls drive the security to an indefensible level, that the bears take control. Traders say this pattern resembles a bull gravestone’s side profile.
3) You should sell the stock after a candle gets closed below the Gravestone Doji’s tiny body.
4) Never trade gravestone Doji without a stop loss. Also, it would be better to place the stop-loss above a candlestick’s peak.
5) When trading the Gravestone Doji, you have 02 profit targets. For larger Gravestone Doji candles, allow the price to become equal to the formation size. Secondly, targeting profits twice the Gravestone Doji’s size works better with a smaller Doji candle.
6) If the market continues to trend in your favor, be patient. Set your stop beyond the target. Keep trading until two bullish candles appear. This suggests the bearish move is over.
Undoubtedly, Doji candlesticks are one of the most common reversal patterns, and the Gravestone Doji is one of its variations. When identified and confirmed appropriately, Gravestone Doji can lead traders to explore profitable opportunities. However, as with any other strategy or pattern, it takes time to identify an edge and master it. It is best to test your strategy using a simulator first and practice well before trading on the live market.
Gravestone Doji doesn’t always reflect profitable opportunities. Despite indicating a price reversal reasonably well, it still needs to be used properly in line with other elements of your strategy. Remember, do not make conclusive decisions based on Gravestone Doji alone. Instead, it is best to use it in conjunction with other tools, indicators, or price action confirmations of your strategy. There are plenty of tools available today to help your way to profitability. Since you’re familiar with Gravestone Doji now, identifying it and using it in your trading shouldn’t be a problem for you. However, sound knowledge of trading is not the only major constraint for traders. Instead, most beginner traders struggle from the pressure of wanting to flip their accounts fast mainly due to having a relatively small amount of capital to start trading. In turn, this affects the performance of traders negatively more often. If you’re a trader struggling with a lack of capital, you can check the funding solutions offered by Traders Central and choose an option that suits you whether it’s the challenge model or instant funding depending on your preference. This will help you eliminate the pressure of wanting to flip accounts fast and give you peace of mind to simply focus on your trading craft only.