The candlestick is very effective in all timeframes, 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. Many traders believe that the Doji candlestick, especially in an overbought or oversold condition, is one of the most predominant reversal indicators. A Doji that occurs in the context of a strong trend at least implies the weakening of the momentum that resulted in that trend.
When a Doji appears at the top of a trend, especially in an overbought area, consider selling immediately. However, when a Doji appears at the bottom of an extended downtrend, especially in an oversold area, look for additional buy signals the next day to confirm the reversal. Otherwise, the momentum in the market could take the trend lower.There are nuanced variations of the doji candle. The “dragonfly” and “gravestone” Doji demonstrate, respectively, that sellers and buyers controlled the market for most of the trading period, but then the opposite group managed to push price back to the open before the close.
Traditional and long-legged dojis are reflective of indecision and stalling. Gravestone and Dragonfly dojis, however, are strong indicators of a change in momentum that pushed the price away from the body and in the direction of the wick or open/close. An extensively long shadow on a Dragonfly Doji at the bottom of a trend is very bullish. Dojis that occur in multi-signal situations (oversold or overbought territory, support or resistance ranges, volume, etc.) make those signals more convincing reversal signals.
The Bigger Picture
What matters most is that the body of these candlesticks is near zero and, if with a long shadow, that the long shadow be at least twice as long as the body. The color of any of these specific candlesticks, if any at all and whether green or red, white or black, is of less importance. When a zero- or near-zero bodied candlestick with a long wick appears in the context of a trend, it often signals a potential reversal of that trend.
That is even more relevant when these candlesticks patterns occur in territories of support or resistance set by moving averages or prior highs or lows, or overbought and oversold conditions set by indicators like RSI. Moreover, volume is not to be overlooked. Avoid buying into breakouts with low volume. Most important for a trader is to figure out what is is going on in terms of supply and demands, what is going on in the minds of participating bulls and bears, and how momentum is changing. Candlesticks, in confluence with other signals, can tell a very nuanced story.
Gravestone and Dragonfly dojis are similar to hammer and hanging man candlestick patterns.