$20,000 on a given day even if its price fluctuates between $25,000 and $15,000 during the specified 24-hour period.
Doji candle illustration
So the $25,000 price level – or the intraday high – represents the upper wick of the doji, and the $15,000 price level – the intraday low – represents the lower wick of the candle.
How does a doji candle work?
Doji candlesticks have historically helped traders anticipate the bottoms and peaks in the market as the calm before a storm of some sort.
For example, a Doji candlestick that forms during an uptrend can indicate bullish exhaustion, that is, more buyers are moving to the sellers side, which usually leads to a trend reversal.
It is correct to note that the Doji pattern does not necessarily mean that there will always be a trend reversal. Instead, it shows indecision among traders about future directions.
Thus, it is best to confirm the Doji candlestick signal with the help of additional technical indicators. For example, a technical indicator such as the Relative Strength Index (RSI) and/or Bollinger Bands can give more weight to what the Doji pattern suggests.
Related: 5 More Bullish Candlestick Patterns Every Bitcoin Trader Should Know
Types of Doji Patterns and How to Trade Them
Doji patterns can vary depending on the position and length of the shadow. These are the most common forms:
A neutral doji
A neutral Doji consists of a candlestick with a nearly invisible body located in the middle of the candlestick, with the upper and lower wicks of similar lengths. This pattern appears when the bullish and bearish sentiments are in balance.
Traders can combine a neutral doji with momentum indicators such as the RSI or the Moving Average Convergence Divergence (MACD) to help identify potential market tops and bottoms.
The daily price of BTC/USD is characterized by a neutral doji candlestick pattern. Source: TradingView
For example, the occurrence of a neutral Doji in an uptrend in conjunction with an overbought RSI (>70) could indicate an imminent market correction. Similarly, the occurrence of a candle in a downtrend when the RSI turns oversold (<30) can precede a market bounce.
Long legged doji
A long-legged doji has longer wicks, which indicates that buyers and sellers tried to aggressively control price action at some point during the candle's time frame.
Regular doji vs. long legged doji. Source: Commodity.com
Traders should watch the candlestick's closing price carefully when identifying a long-legged Doji pattern.
It should be noted that the Doji is a bearish signal if the closing price is below the middle of the candlestick, especially if it is close to the resistance levels. Conversely, if the closing price is above the middle of the candle, it is bullish, as the pattern is similar to a bullish pin bar pattern.
Long-legged bearish doji illustration
If the closing price is in the middle, it can be considered a trend continuation pattern. In this case, it is always possible to refer to the previous candles to predict future trends.
Dragonfly Doji
The Dragonfly doji looks like a T-shaped candle with a long lower wick and almost no upper wick. This means that the opening and closing price and the high price are almost at the same level.
Dragonfly doji illustration
If the Dragon Doji pattern forms at the end of a downtrend, it can be considered a buy signal, as shown below.
Ethereum/USD daily price chart showing the Dragonfly Doji. Source: TradingView
Conversely, the occurrence of the candle during an uptrend indicates a possible reversal.
Doge's headstone
Gravestone Doji is an inverted T-shaped candlestick, the opening and closing coincide with the bottom. The candle indicates that the buyers tried to increase the price but were unable to sustain the bullish momentum.
