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.