Doji Candlestick

I ran across this great article today.  This is truly an effective and simple strategy.  I really like how this trader uses the “doji pattern” to make decisions when trading.  If you don’t know what a doji is, it is a bar that has an open and close point at nearly the very same spot.  It looks like a plus sign on the chart, so it’s easy to spot.  If you aren’t sure what I’m referring to, then do a quick “Google Image” search on “doji candlestick” and you can see what they look like. – Ann

Day-Trading With the Power of the Doji
By Michael J Parsons

Early in my trading career while I was still rather naive I paid for a course on a trading method based on an “inside bar”, which is a bar that has a lower high and higher low than the previous bar. I thought that the method looked promising and the idea seemed rather simple, once price exceeds the high or low of the inside bar then you would buy or sell. A stop would then be set just beyond the other side of the inside bar. Unfortunately, even though price would often might break the high or low price it still tended to consolidate afterward rather than make a strong move. It obviously wasn’t as definitive of a move as I was originally led to believe. Additionally, the entry placed the trade entry late in the move and when the trade did fail, which was often, it would result in losses that were a bit rich for my taste. Particularly when they were repetitive. It did not take me long to abandon this form of trading.

In time I also learned about another bar called the Doji, which is used in candlestick charts. Although candlestick methodology uses this bar in quite a variety of combination s that made learning rather complex, I did take note of one very simple way it could be applied and returned to the earlier concept of trading the inside bar using the Doji bar instead.

A Doji bar is simply defined as a price bar with a similar open and close. On a chart it looks very much like a plus sign as used in mathematical addition. Often it is an inside bar, but not always. What makes this bar unique is that the open and close are typically the exact same price or at least extremely close, so it is easy to identify and find on a chart. Because it begins and ends with the same price it acts as a minor equivalent to a support and resistance level. It was this very fact that gave the Doji a higher rate of success when using the rules of the inside bar method. With a definitive price level the likelihood of violating it after price had chosen a side was very small. This reduced the failure rate dramatically.

As with any support and resistance level, the Doji open/close price can be used to signal an entry based on the direction that price gravitates away from that price level. A higher move would signal a buy and a lower move would signal a sell.

If price moves above the Doji bar high then buy

If price moves below than the Doji bar low then sell

Even better than this, an earlier entry can be made if price has already demonstrated a propensity for trending and the Doji itself is the recent high or low of the trend.

If the market is strongly trending higher then buy at the open if the next bar opens at Doji closing price or higher.

If the market is strongly trending lower then sell at the open if the next bar opens at Doji closing price or lower.

When a market is already in a strong trend then a Doji will typically result in only a momentary consolidation followed by a continuation of the prior trend. Statistically, this is what the odds favor so entering as early as the following bars open will usually result in a profitable position very quickly. A stop can be placed just beyond the Doji bar high or low which is typically within a very close range, so loses are kept at a bare minimum if the trade should fail.

Although entering on the following bars open will have a higher percentage of failures where your stop is activated, failures are still rather infrequent.

This is a simple strategy that is easy to learn and implement without interfering with any other trading approach. Keep it in mind the next time you see a little plus sign show up on your chart. It could be telling you its time to add some money to you account.