Candlestick Trend Reversal Patterns-The Four Dojis
There are certain Candlestick Patterns that are vital to your trading. They are vital because they identify possible trend reversals. Why should you identify these candlestick patterns? Because they can make you money! Failure to spot these candlestick patterns can lead to costly trading mistakes.
Ask any trader who uses candlesticks in trading, which of all the candlestick patterns is the most important to recognize. He or she will unhesitatingly say a Doji. Appearance of this pattern is often a signal for the beginning of a minor or an intermediate trend.
Appearance of a Doji on the Candlestick Chart can mean a possible trend reversal. So, you should not take this pattern lightly when it appears on the candlestick chart. There are four type of Doji, the Common, The Long Legged, The Dragonfly and the Gravestone.
The common thing between these four Dojis is the fact that the opening and the closing prices were the same. In other words, the prices closed at the same level at which they had opened.
This means that the battle between the bulls and the bear was a draw and there was no winner. If it had been a long uptrend, this means that the bulls have exhausted their momentum and will start losing the battle soon.
Similarly when a Doji appears after a long downtrend, it means a potential bottom.
Common Doji is usually taken as an indecision pattern. However, a Long Legged Doji Pattern means that the prices had tried to move higher but could not sustain them in the market. So they had to come down and close at the opening price in the middle of the candle.
If you find a Long Legged Doji formed outside the Upper Bollinger Band, it means a possible trend reversal.
A Gravestone Doji indicates that prices had rallied higher on the day but buying could not be sustained in the market and the prices came back and closed at the open. A Dragonfly Doji is the exact opposite of the Gravestone Doji. Prices opened at the high then selling kicked in the market later on buyers found the courage to start buying and the prices came back to close at the open.
Now, you need to assess the appearance of a Doji by carefully noting when it occurred on the candlestick chart. Appearance of a Doji in the early stages of a trend may mean nothing. Similarly, if you find the Doji appearing in the middle of a Bollinger Band, it may mean a pause rather a reversal of a trend.
Article Source: FxTradingStock.com
About the Author
Mr. Ahmad Hassam has done Masters from Harvard University. Get these 3 Swing Trading Systems FREE. Master these highly profitable Candlestick Patterns with this FREE 82 page PDF Candlestick Guide.
by: Ahmad Hassam
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Date: Tue, 30 Nov 2010
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