A chart records, it does not explain: Doji

As I said before, a chart records it does not explain. This article will talk about the doji.   There are several types of doji.  For a more complete list check out stockcharts.com.  The basic definition is a close near the open.  They are most effective on a swing high or low. A swing high is the highest of a three bar sequence and swing low is the lowest in a three bar sequence.  (See below for entry information.)

When a doji is formed it is because one side was defeated.  In the case from above, buyers were trying to move the market higher.  When there were no more buyers because of lack of interest or selling density  the market turned offer.  Further explained, the new prices did not attract more buyers to move the price higher.  It may also be that that seller density was high, for example if the offer is at 200 up on the book, the price I can buy at the market.  Assuming the orders are real, it will take 200  contracts bought to move the market up one tick.  Instead of 200 up it could be 5000 up.  It will take 5000 contracts bought at the market to move it higher.  If you are trying to buy a break out and it fails most traders get out.  This is what causes the market to return to opening price.

The trading strategy that is used is to enter as close to the doji bar close.  Entry is taken on the preceding bar with a stop above the high of the doji bar.  It is a counter trend trade so be aware of those risks.  I said above they are most effective on a swing high or low, the problem is you are entering on the third bar, it is not a swing high or low till the bar you enter closes. Volume is important in determining if it is a lack of buyers or seller density.  If it is lack of buying, buyers may come in at the lower price (the price you will be entering).  If it is seller density they should continue selling as the price moves lower and may not give you a chance to enter.

If you have a different explanation I want to here from you.  If you have another chart pattern you want  analyzed leave a comment or send me an email.

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2 Responses to A chart records, it does not explain: Doji

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