Doji Reversal Setup

The doji reversal setup pinpoints indecision in the market, which can highlight profitable reversal opportunities. It is a sign of major indecision, especially if the pattern forms after a period of trending behavior. With this pattern, a five-minute doji does not have the same psychological power as a sixty-minute doji.

PATTERN SUMMARY

The open and close prices of the doji should fall within 10 percent of each other, as measured by the total range of the candlestick.

For a bullish doji, the high of the doji candlestick should be below the ten-period simple moving average.

For a bearish doji, the low of the doji candlestick should be above the ten-period simple moving average.

For a bearish doji, one of the two bars following the doji must close beneath the low of the Doji.

For a bullish doji setup, one of the two bars following the dojo must close above the high of the Doji.

PATTERN PSYCHOLOGY

If buyers have been controlling a bullish advance over time, you will typically see full-bodied candlesticks that personify the bullish nature of the move. However, if a doji candlestick suddenly appears, the indication is that buyers are suddenly not as confident in upside price potential as they once were.

This is a point of indecision, as buyers are no longer pushing the price to a higher valuation; Doji Reversal Setup has allowed sellers to battle them to a draw—at least for this one candlestick.

This leads to profit taking, as buyers begin to sell their profitable long positions, heightened by responsive sellers entering the market due to perceived overvaluation. This “double whammy” of selling pressure pushes prices lower as responsive sellers take control of the market and push prices back toward fair value.