Doji: How To Use It To Make Profit

doji-candlesticks

Doji is candlestick pattern which signifies a balance in between supply and demand by opening and closing at the same price.

 

How are they identified?

Dojis form when a security’s open and close are virtually equal. A doji candlestick looks like a cross, inverted cross, or plus sign. Alone, doji are neutral patterns.

 

What does it signifies?

The Doji conveys a sense of indecision or tug-of-war between buyers and sellers. The relevance of a doji depends on the preceding trend or preceding candlesticks.

Doji indicate that the forces of supply and demand are becoming more evenly matched and a change in trend may be near. Doji alone are not enough to mark a reversal and further confirmation may be warranted.

Doji act as warning signal that trend might change. You should wait for confirmation.

usd-chf-daily-chart-doji

As you can see in the above chart of US Dollar and Swiss Franc a doji forming in 28 april with opening and closing at minimal distance. After the doji the long white candle confirm the change in trend and the usdchf move in the direction of uptrend.

Same thing happen in the other doji but this time the doji is made at the top of the up trend giving you the warning that the trend might change. At next day the long black candle confirms the change in trend from up to down.

As I have said earlier that doji gives us only warning not a confirmation signal so wait for the other candle after doji to confirm your signal.

 

Candlestick Pattern: Dark cloud cover

 candlesticks-dark-cloud-cover

How are they identified?

Essentially, the large black candle is forming a “dark cloud” over the preceding bullish trend. Dark cloud cover is a reversal candlestick pattern.

Open of second candle is above the previous close and then the price push down.

The dark cloud must have a closing price that is:

  • within the price range of the previous day, but
  • Below the mid-point between open and closing prices of the previous day.

 

What does it signifies?

  • A change in trend and that the other side is becoming strong.
  • What are the points that make them more effective?
  • A preceding bullish trend
  • The more the price penetrates in the first candle the stronger the signal.
  • If the second have a shaved head which mean no upper shadow. The opening price of the market is also high of the market it will increase the strength of the signal. And if the there is also no lower shadow mean low of the day is close the signal is more strong.
  • If the opening is above an important resistance level and then it close in the second candle it increase the power of the dark cloud cover pattern.
  • If there is very high volume on opening mean new buyers are getting in the market. If the price closes lower. Then the market sells off. It shows the bears are strong. And trend is changing.

 GBPUSD-dark-cloud-cover

As you can see in above chart of GBPUSD that two white candles is made and after that the next candle open at the top of previous candle and went up but retrace in the pattern again and cover more than 50% of the previous candle.

Which make it good dark cloud cover but the down trend come after some consolidation.

Shooting Star

shooting star

 How are they identified?

A type of candlestick formation that results when a security’s price, at some point during the day, advances well above the opening price but closes lower than the opening price. In order for a candlestick to be considered a shooting star, the formation must be on an upward or bullish trend. Furthermore, the distance between the highest price for the day and the opening price must be more than twice as large as the shooting star’s body. Finally, the distance between the lowest price for the day and the closing price must be very small or non-existent.

 

What does it signifies?

  • A Shooting Star can also mark a potential trend reversal or resistance level.
  • It is not a major reversal signal like evening star but it an indication of change in trend.

 

As you can see in below chart of USD/CHF

usd-chf-shooting-star

The shooting star is black with a long upper shadow and very little lower shadow. The star has a small real body. The trend before the star is not very much straight to top but a choppy one.

But as you can see that after the shooting star the long black candle clearly give us a reason that the trend has changed and we should trade in short side.

You can trade this set up with take stop loss at the high of shooting star and sell USDCHF at the opening of the next candle.

Always trade with stop loss so that you can preserve your capital. Technical analysis will help you improve your odds of success but will not remove your failure altogether.

Here on completetechnicalanalysis.com we teach you for free how to use technical tools to improve your odds and get a edge.

Hanging Man

How are they identified?

A bearish candlestick pattern forms at end of uptrend. It is created when there is a significant sell-off near the market open, but buyers are able to push this stock back up so that it closes at or near the opening price.

  • Small real body.
  • Long lower wick more than twice the real body.
  • It forms at the top of an uptrend.

 

What does it signifies?

This formation does not mean that the bulls have definitively lost control, but it may be an early sign that the momentum is decreasing and the direction of the asset may be getting ready to change.

 

What are the points that make them more effective?

The reliability of this signal is drastically improved when the price of the decreases the day after the signal.

The color of the real body is not important but it improves result if hammer has white and hanging has a black real body. Longer the lower shadow the shorter the upper shadow the more meaningful is the bearish reversal signal the hanging man.

Below is a 4 hour chart of USDCHF US dollar vs. Swiss Franc

usdchf-4hr-hanging-man

As you can see in above chart that there is a hanging man formation after a rally. The upper shadow is small and the lower shadow is long. Even if the real body is of white color we see a decline in the candle after the hanging man which conform the signal.

The color of the real body is not important.

Three Black Crows

Three black crows or sometime called three winged crows are bad news as crows sitting on your rooftop. They are indication that the trend is going to change that the power has changed hands for bull to bear.

This pattern has three long black candles which open inside of previous candle and close below the previous candle. You should cover your longs if you see these candles.

 

How are they identified?

This pattern consists of three consecutive long-bodied candlesticks that have closed lower than the previous day with each session’s open occurring within the body of the previous candle.

 

What does it signifies?

The three black crow’s pattern is a sign of the bulls’ lack of conviction in the current uptrend. So the trend is changing.

 

What are the points that make them more effective?

  • A significant up trend
  • Candles must be long

EURJPY-THREE-BLACK-CROWS

In the above daily chart of EURJPY you can three black crows pattern where the open of the new candle is at the close level of previous candle and close of the new candle is below the previous levels.

You can enter a trade in this pattern by placing your stop just above the high of the third candle and take profit according to the risk reward levels.

Candle sticks do not provide a profit targets so you have to use different methods to calculate profit targets for your trades.

Three White soldiers

Three white soldiers or three advancing white soldiers is a continuous pattern in which you will three large white candles making a new high every time it close.

It indicates that the bulls are in strength and market is advancing. If the last candle or last two candle of this pattern is smaller than the first then it is sign of weakness but not of reversal so you should tight you stop loss but do not take a short position till it cross a support level.

 

How are they identified?

This pattern consists of three consecutive long-bodied candlesticks that have closed higher than the previous day, with each session’s open occurring within the body of the previous candle. And then closing above the previous one.

 

What does it signifies?

It’s a sign of the change in investor sentiment and is used by traders to confirm a shift in momentum from bear to bull mentality.

So you should cover your shorts and make long trades in the market.

 

What are the points that make them more effective?

  • A prolonged downtrend
  • If candle is significantly long.

 

EURJPY-THREE-WHITE-WHITE-SOLDIER

 

You can see in above chart of EURJPY in 4 hours. The first three white solder pattern after a significant downtrend and then a hanging man forming that corrected the trend.

The second formation is a break out of the consolidation and the last one in the yellow box in again after a short downtrend and the third candle was a small one comparison to the previous trend which is an indication that the uptrend is not that strong where you should tight your stop loss. Then after a short rally we have a hanging man forming that reverse the trend.

You can see that this pattern apply to all the time frames but the most profitable are long ones. So you should trade when trading in Forex market in time frame longer than 4 hour.

 

 

Candlestick Chart Pattern: Hammer

Candlestick Chart Pattern Hammer

Hammer is bottom reversal pattern. It’s a single bar pattern. Which give an indication of change of trend. So finding this pattern in the bottom of downtrend is normal.

But you should wait till the end of next day for the conformation of the change in trend.

 

How are they identified?

A price pattern in candlestick charting that occurs when a security trades significantly lower than its opening, but rallies later in the day to close either above or close to its opening price. This pattern forms a hammer-shaped candlestick.

 

What does it signifies?

It is an indicator of trend is going to change; it’s shows that bull investors are strengthening.

 

What are the points that make them more effective?

  • A significant downtrend.
  • The upper wick is small
  • The lower wick is twice the size of the real body.
  • Color of the candle do not matter.

If all or some of the above condition are true in the pattern that you are looking at then there is a good chance that you will see a trend reversal.

 

eurusd chart with hammer

 

As you can see in the above daily chart of EUR/USD there is hammer pattern at the bottom of downtrend which totally reverse the previous trend.

The real body is small. But the upper wick is not small. The lower wick is more than twice the size of the real body.

You could have buy EURUSD the next day with stop loss at the low of the hammer and you would have made a great risk and reward return.