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Trading the Doji Candlestick

Trading the Doji Candlestick

Student's Question:As per the Doji/Double Doji discription, the pattern implies indesision. How did you determine the direction of the trade?ThanksInstructor's Response:You are correct that the doji implies indecision. It also indicates the potential for a change in direction.So when a trader sees a doji, they would look to determine the direction that the pair was moving prior to the formation of the doji. If the pair was moving up prior to the doji appearing on the chart, we would be looking for a reversal after the doji. The opposite would be true if the pair had been moving down prior to the doji. This change in direction may not occur but if we get stopped out, the loss will be minimal based on our trading plan.Take a look at the historical 4 hour chart of the EURUSD below...

Trading_the_Doji_Candlestick_body_46592d1263344144-post-day-chart-1-12-10.png, Trading the Doji Candlestick

This EURUSD pair had been moving down prior to the formation of the doji. So, when the doji closes, we know that it represents the potential for the pair to move in the opposite direction...to the upside. At the open of the candle following the doji, a trader can take a long position with a stop, as indicated on the chart, below the lower wick of the doji.Again, all trades based on dojis will not work out but with a prudent Risk Reward Ratio, we can put the longer term trading probabilities in our favor.Also, anytime a doji signals taking a trade in the direction of the overall Daily trend, that will be a higher probability trade.

To learn more about candlesticks, if you currently have a live trading account with FXCM, when you have your Trading Station open, click on the Research button along the top. Then click on Trading Course and scroll down through the subjects until you reach Candlesticks. When you click on that button, you will have access to four lessons dedicated to that topic.