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12 Key Candlestick Formation
1. The Doji Signal
Learning how to read stock charts can be a very simple process. The major signals clearly illustrate trend reversals. Most investors, when learning how to read stock charts, feel that they need a multitude of indicators on one chart. Candlestick analysis does not require numerous indicators. When utilizing the major candlestick signals, chart analysis becomes very easy. The major signals reveal an immense amount of information. When learning how to read stock charts, the process should be as simple as possible.
The Doji is one of the most revealing signals in Candlestick trading. It clearly indicates that the Bulls and the Bears are at an equilibrium, a state of indecision. The Doji, appearing at the end of an extended trend, has significant implications. The trend may be ending. Just this fact alone creates a multitude of investment programs that can produce inordinate profits. What is the best method for making big trading profits? Knowing how to read the stock charts! Knowing the direction of a trading entity and the strength of that move! Candlestick analysis perfects that trading strategy. Candlestick charts reveal high probability profitable reversals. Hundreds of years of investing refinement have proven that point.
The Japanese say that whenever a Doji appears, always take notice. A well-founded rule of Candlestick charts followers is that when a Doji appears at the top of a trend, in an overbought area, sell immediately. Conversely, a Doji seen at the bottom of an extended downtrend requires buying signals the next day to confirm the reversal. Otherwise, the weight of the market could take the trend lower. Knowing how to read the stock charts reveals the parameters that make a major signal most effective.
The Doji signal is comprised of one candle. It is formed when the open and the close occur at the same level or very close to the same level in a specific timeframe. In candlestick charting, this essentially creates a cross formation. As the following illustration demonstrates, the horizontal line represents the open and close occurring at the same level. The vertical line represents the total trading range during that time.
DOJI
Upon seeing a doji in an over-bought or oversold conditions, (over-bought or oversold conditions can be defined using other indicators such as stochastics), becomes an extremely high probability reversal situation. When a doji appears, it is demonstrating that there is indecision now occurring at an extreme portion of a trend. This indecision can be portrayed in a few variations of the doji.
Criteria
1. The open and close are the same or nearly the same
2. The length of the shadow should not be excessively long, especially when viewed at the end of a bullish trend.
Signal Enhancements
1. A gap away from the previous day's close sets up for a stronger reversal move.
2. Large volume on the signal day increases the chances that a blowoff day has occurred, although it is not a necessity.
3. It is more effective after a long candle body, usually an exagerated daily move compared to the normal daily trading range seen in the majority of the trend.
A Doji is more relevant after a strong trend, in this case when a doji forms after a strong uptrend, it is indicative that buy orders are diminishing or there is a huge resistance forming just above the doji. This resistance are the sellers jumping in front of a huge locomotive, but if their numbers are weak, they would not be able to stop a strong uptrend and the price would continue to go higher. However, if sell pressure overwhelms the current strength of buyers, it is likely that the trend would reverse and would go further when nervous traders on long position protects and locks their gains by closing their positions.
Types of Doji
Long-Legged Doji
This indicates a strong battle between the "bulls" and the "bears" like dragging the price with a strong resistance all the way to where they wanted but lost control to the opposing force. A long-legged doji shows that the market traded at a wide range for a specific period. It is characterized by long twin shadows above and below its body.
Gravestone Doji
This simply states that the bulls lost their shirt in battle, somehow, buyers dominated most of the session but caught off guard by sellers suddenly resurfacing pushing the price to where it opened. Since there are no lower shadows or wicks, buyers still supported the price indicating that the sell pressure isn't enough to break the price level. Gravestone Doji is formed when the price traded higher but ended the period back down near or on its open price.
Dragonfly Doji
This is the reverse of the Gravestone Doji where sellers were able to drag the price down but a sudden surge in buy orders weakened their grip. This indicator shows that the "bulls" are building up force and starts applying pressure upwards, a very long bottom shadow Dragonfly Doji can be interpreted as a bullish signal, due to the fact that the price has been dragged all the way down, but still managed to re-surface back to its opening price, only a very strong surge in buy volume can generate this kind of movement.
Four price Doji
This Doji indicates extreme balance between buyers and sellers resulting in a stalemate in price. The Doji lacks both lower or upper shadow since the price never moved the entire session.
