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The Dynamic Doji - A Clear Trend Reversal Signal

The Doji  is one of the most revealing signals in Candlestick trading. It clearly indicates that the bulls and the bears are at an equilibrium, a state of indecision. The Doji, appearing at the end of an extended trend, has significant implications. The trend may be ending. Just this fact alone creates a multitude of investment programs that produce inordinate profits. What is the best method for making big trading profits? Knowing the direction of a trading entity and the strength of that move, Candlestick analysis perfects the trading strategy. Candlestick formations reveal high probability profitable reversals. Hundreds of years of investing refinement have proven that point.

Candlestick analysis incorporates approximately 50 to 60 Candlestick signals. However, twelve of the signals, considered the major signals, will produce the vast majority of the trend reversals. Recognizing and understanding the psychology that formed these major signals will provide completely new insights for investors in understanding optimal times to buy and sell. Japanese rice traders realized that prices do not move based on fundamentals, they move based on the investor perception of those fundamentals. The Doji signal is one of the most predominant reversal indicators. It is very effective in all-time frames, whether using a one-minute, five-minute, or fifteen-minute chart for day trading or daily, weekly, and monthly charts for the swing trader and long-term investor.

The Japanese say that whenever a Doji appears, always take notice. A well-founded rule of Candlestick followers is that when a Doji appears at the top of a trend, in an overbought area, sell immediately. Conversely, a Doji seen at the bottom of an extended downtrend requires buying signals the next day to confirm the reversal. Otherwise, the weight of the market could take the trend lower.

The Doji signal is composed of one candle. It is formed when they open and the close occur at the same level or very close to the same level in a specific timeframe. In Candlestick charting, this essentially creates a “cross” formation. As the following illustration demonstrates, the horizontal line represents the open and close occurring at the same level. The vertical line represents the total trading range during that time.

 

 

Doji Star

Upon seeing a Doji in an overbought or oversold condition, an extremely high probability reversal situation becomes evident. Overbought or oversold conditions can be defined using other indicators such as stochastics, When a Doji appears, it is demonstrating that there is indecision now occurring at an extreme portion of a trend. This indecision can be portrayed in a few variations of the Doji.

 

 

Long-legged Doji

The Long-legged Doji is composed of long upper and lower shadows. Throughout the time period, the price moved up and down dramatically before it closed at or very near the opening price. This reflects the great indecision that exists between the bulls and the bears.

 

 

 

 

Having the knowledge of what a Doji represents, indecision, allows the Candlestick analyst to take advantage of reversal moves at the most opportune levels. Regardless of whether you are trading long-term holds for day trading from the one-minute, five-minute, and fifteen-minute charts, the Doji illustrates indecision in any time frame.

 

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doji candlestick pattern after trend is a sign of indesicion

 

In a Doji pattern, the market explores its options both upward and downward, but cannot commit either way. After a long uptrend, this indecision manifest by the Doji could be viewed as a time to exit one’s position, or at least scale back. Similarly, after a long downtrend, like the one shown above of General Electric stock, reducing one’s position size or exiting completely could be an intelligent move.

It is important to emphasize that the Doji pattern does not mean reversal, it means indecision. Doji’s are often found during periods of resting after a significant move higher or lower; the market, after resting, then continues on its way. Nevertheless, a Doji pattern could be interpreted as a sign that a prior trend is losing its strength, and taking some profits might be well advised.

 



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