Reading candles
Doji
A candle that opened and closed at almost the same price, showing indecision for that period.
Tested more than once and no dependable profit survived costs.
Tests on stocks, index futures and EURUSD mostly find no reliable profit once costs are counted; the few positive results are in stock markets and depend on the exit rule. A pattern describes what price just did. It is not a forecast.
What it is
A plain doji has a very small body. A dragonfly has a long lower wick, a gravestone has a long upper wick, and a long-legged doji has long wicks on both sides.
What it suggests
Neither side won the period. After a strong move it can mark a pause, which says the pace changed and nothing about the direction that follows.
How to check it
Note the move before it, the level it formed at, and what the next candle does. A doji alone is a pause, and the next candle carries the information.
Common mistakes
- Calling a reversal from a doji alone.
How we will test it
On public price history, never on anyone's account. Until it is done, the note above is all we can honestly say.
- Cases: a doji after an impulse move
- Measure: share of cases where the next 5 candles close beyond the doji's high versus its low
- Window: next 5 candles
- Compared with: any candle of similar range
Sources
- Marshall, Young and Rose (2006), Candlestick technical trading strategies: can they create value for investors? Journal of Banking & Finance 30(8) (citation and headline finding only)
- Duvinage, Mazza and Petitjean (2013), The intra-day performance of market timing strategies and trading systems based on Japanese candlesticks, Quantitative Finance 13(7) (abstract or primary page read)
- Fock, Klein and Zwergel (2005), Performance of candlestick analysis on intraday futures data, Journal of Derivatives 13(1) (citation and headline finding only)
- Orquin-Serrano (2020), Predictive power of adaptive candlestick patterns in forex market: EURUSD case, Mathematics 8(5) (abstract or primary page read)
- Lu, Chen and Hsu (2015), Trend definition or holding strategy: what determines the profitability of candlestick charting? Journal of Banking & Finance 61 (citation and headline finding only)
Related lessons
Written in our own words. Education only, not financial advice.