This article explores how swing traders can utilize Doji candlestick patterns to make profitable trades in the stock market. The article explains what Doji candlesticks are, how they work, and provides practical tips for identifying them and using them in trading. Readers will learn how to incorporate this strategy into their trading plan and potentially increase their profits.
We use candlesticks to identify trading patterns. With the help of patterns traders initiate trades. The patterns are formed by candles may be of single candle or two or more candles. Sometimes, just a single candle creates powerful signals if identified perfectly. There are a few single candlestick patterns which are very important. These are;
- Marubozu (Bullish and Bearish)
- Doji
- Spinning Tops
- Hammer
- Shooting Star
- Hanging Man
Today we will discuss about Doji candlestick patterns and its importance to create consistent profits from swing trading.
What is a doji candlestick pattern?
The Doji candlestick pattern is a single candle chart pattern that occurs when a candle's open price is equal to close price with virtually no real body like spinning tops. Doji provides crucial information about the market participant's sentiments. It looks like a cross sign as '+' with tiny or no body with upper and lower wicks. The colour of the candle does not matter. The Doji has similar implications as the Spinning Top. Actually it is a neutral candlestick pattern or indicates indecision in the market.
There are different types of Doji. A few of the most famous are:
- Long-Legged Doji
- Gravestone Doji
- Dragonfly Doji
- Doji Star
We will discuss only three Doji candlestick patterns, i.e. Long-Legged Doji, Gravestone Doji and Dragonfly Doji and how to trade profitably on regular basis. This single candlestick pattern may occur in any time frame in any market. We will take these three types of Doji candlestick with respect to swing trading purpose.
How to identify Doji and trade accordingly?
1. Long-Legged Doji:
The Long-Legged Doji pattern has a similar length of upper and lower wicks and a tiny body.
The Long-Legged Doji works best with the context of price action. Before formation of Long-Legged Doji there must be a previous swing which we should look into before planning a trade. It gives us a potential price reversal signal in a defined up or down trend. If it is formed in a range-bound market it suggests more consolidation. Below is an example of Long-Legged Doji candlestick pattern occurred in BSE Ltd. 27th April, 2022. The stock on that day made a high of Rs 832 and made a low Rs 814 and finally closed nearer to the open price of Rs 825. Next two days the stock rallied up to Rs 922. If anyone wants to trade the stock, he may buy it at Rs 825 keeping a stop-loss at Rs 814 (low of the candle) he can earn easily a return of 10% in two days.
Here we saw the stock was in a downtrend, bears were in full control. But on 27th April there was a two ways price rejection from the buyers as well as from the sellers and ultimately the price close as same as opening price forming a Long-Legged Doji
If a Long-Legged Doji is formed at the high in uptrend the price will fall, if Long-Legged Doji is formed in downtrend the price will rise. You have to find it at the right spot.
2. Gravestone Doji:
A Gravestone Doji candle is a pattern that indicates a bearish reversal may happen soon. This pattern forms when the open, low and closed prices of an instrument are close to each other and have long upper wick. It shows that the buyers tried hard to push the prices higher but at the higher point sellers took the control of the instrument and were able to bring down the price lower.
Gravestone means stone on the grave. Buyers are buried under the ground and bears kept stone on the grave. Now price will fall.
The chart below shows that a Gravestone Doji was formed in Deepak Nitrite daily chart on 3rd January, 2023. The stock or 3rd Jan 2023 made a high of Rs. 2018 and closed near the open price and low price at around Rs. 2000. See the fall from from next day onwards. One can achieve 10% easily if he sells below Rs 2000 keeping a stop-loss at the high of Rs 2020. The price came down at Rs 1730. This is the most interesting part of swing trading.
3. Dragonfly Doji:
The opposite of Gravestone Doji is Dragonfly Doji. In a downtrend at the bottom Dragonfly Doji is formed. The downtrend indicates that the bear was in full control. But at the bottom buyers made and attempt to push the price higher, the bears lost the ground. Below is an example of Axis Bank in weekly time-frame in 3rd week of June. After a downtrend a Dragonfly Doji was formed, get a closing around Rs 643. After that the stock made a high around Rs 900+. It is an example of short term investment with the help of Dragonfly Doji. The stop-loss should be at Rs 625 [low of the candle]. Buy would be at Rs 645. It gave a return of more than 10% in next two-three candles, if one could hold for one to two months, he might have earned more than 20%.
Conclusion: These Doji patterns are very useful to make consistent profit if perfectly identified. Beginners will find it easy to identify these patterns, so we advise new traders to avoid intraday trading for sometime because intraday is risky. After learning and growing some execution skills, you may try later. First work hard with discipline, bring confidence as a trader, then you will be successful in the market. So focus on learning.
Disclaimer: The information provided on Money Wise Mind is for educational and informational purposes only. It is not intended to be financial advice, and you should not rely on it as such. Before making any financial decisions, you should consult a licensed financial advisor.
