Investing in a volatile crypto platform is not as easy as it seems. It involves analyzing the best coins, their price history, tokenomics, utility, etc. There are many technical analysis available in crypto that helps an investor in making informed decisions. One such technical analysis is the Doji candle pattern, which we will be discussing in this article.
What is the Doji Candle Pattern?
The doji candle pattern is a technical analysis used to predict the price patterns of a crypto investment. It is represented by a candle that looks like a plus sign or an inverted cross. The candle when clustered indicates a trend reversal and an uncertainty of future prices. The patterns formed by the candle signal changes in the market including volatility, sentiment, and growth momentum.
The History of a Doji Candle Pattern
Doji is a Japanese word meaning ‘the same thing’. It represents the uniqueness of an open and closed price being exactly similar. In simpler words, the close price should match the open price.
All factors of the asset are represented in the price, however, the price has nothing to do with the past price, and the present price is not related to the intrinsic value. Keeping this in mind, a Japanese rice trader named Honma introduced a candlestick chart.
Advantages of Doji Candle Pattern
- It provides insights into trend reversals.
- It is utilized to analyze market uncertainty, allowing users to make informed decisions.
- It helps to monitor the trend, providing a more profitable entry point.
How does a Doji Candle Pattern work?
The Doji candle pattern forms a cross pattern indicating an offsetting of the assets of a buyer and seller. Every candle pattern has four sets of data: high price, low price, open price, and close price.
The bar-like pattern created by the candle is called the body. The extended lines from the body are known as shadows. If the close price is higher than the open price, a hollow candle stick is formed. If the close price is lower than the open price a filled candle stick is created. If both the close price and open price are the same, a doji candle pattern is formed.
In the doji pattern, the price neither goes upside nor downside, keeping buyers and sellers in a standoff. In most cases, doji represents a price reversal, though it can also occur when the buyers and sellers are aiming for a new trend to start.
Different Types of Doji Candle Patterns
There are different types of Doji candle patterns, each pattern indicates different weights.
1. Long-legged Doji
Long-legged doji has long shadows, either up or down. It indicates buyers and sellers are trying to gain control of the price action. During a new trend period, the price rises highly and then declines. When the trend reaches an end, the price returns to the beginning point or near it.
2. Dragonfly Doji
The dragonfly doji forms a ‘T’ shape. In this pattern, the longer lower wick indicates open, close, low, and high prices are almost at the same level. If the dragonfly doji pattern is formed by the end of a downtrend, it indicates a buy signal, and if the pattern is formed during an uptrend a price reversal can be anticipated.
3. Gravestone Doji
A gravestone doji is represented as an inverted ‘T’. In this pattern, the open and close prices coincide with the lower price. The gravestone doji pattern indicates a failure to sustain the bullish momentum by buyers in an attempt to increase the price. The gravestone doji pattern during an uptrend indicates a reversal and a potential retracement during a downtrend.
4. Four-price Doji
Four-price doji is a rare case on a candlestick chart. It is a sleeping line, indicating all four price indicators, including open, close, low, and high, are at the same level or the market is stable during the period. The four-price doji is not a reliable indicator and is avoided in most cases.
Limitations of Doji Candle Pattern
- Doji candle patterns sometimes indicate false movement, creating bull traps and bear traps.
- It is responsive to market conditions, making it inefficient for short time frames.
- The different types of doji candle patterns can create confusion.
Also Read: What Is Lens Protocol? How It Works & Why It Matters
Final Thoughts
Doji candlestick patterns provide warning signals to investors and allow them to make informed decisions. It helps to find a good entry point, increasing the chances of earning more profit. There are different technical indicators available in the crypto market. Traders can choose the one they find more effective and apply it to monitor the market risks.