The doji is a common and simple type of candlestick pattern that is seen often on forex or any candlestick chart. This trading strategy is called the “double doji” trading strategy. It is a very simple strategy and that’s what makes it easy to spot and verify, which increases the probability of getting this strategy right the first time.
Firstly , what is a doji?
A doji is the name given to the type of candlestick. In general a doji candlestick pattern has the same opening and closing price (or very close to the same). So you get a small candlstick body, and long tails. The doji represents market indecision, some traders think prices will rise, and others think the value of the asset value will fall. In the end, it’s a wash. Here are some images of the types of doji you will see.
Neutral or regular doji – this cross design has the open price and the close price is same, and the high and low are about the same distance from the center prices.
Long legged doji – the high and low prices are distant from the open and close prices. This reflects not only indecision, but usually higher volume and greater disparity of prediction.
Gravestone doji – long upper tail, and no lower price. Usually a good indication of trend reversal.
Dragonfly doji – only a long shadow under the identical opening and closing price. Again may indicate trend reversal signal.
Here is a video about what a doji is below, and here is a link to the wiki page on doji
How is a doji normally used?
A doji is normally used as a trend reversal indicator, forming at the top of an uptrend (bullish), and the bottom of a downtrend (bearish). It also has greater significance if there is high volume and after and extended move up or down. So if you see a major uptrend, and then see a doji, you are looking for a reversal. Conversely if you have a major downtrend and then see a momentum change with a doji, it may indicate a reversal.
There is even another pattern named after this trend reversal indicator effect of the doji, it is calle the morning doji star (or evening doji star for the opposite).
So what is the double doji? Please explain.
A more accurate name is “Double Doji Break”. This pattern is 2 or more dojis next to each other. Where and when they appear is of crucial importance to this strategy.
Ideal conditions of the DDB
Firstly – here is what is NOT ideal? – The double doji break pattern is common when there is a lot of indecision in the market, such as a ranging market, this makes perfect sense, since the doji in effect represents indecision. If the market is ranging then the double doji is not a significant. So DON’T trade the double doji break in a ranging market.
Here is what to look for (triggers)
- Using tick charts is the best when scalping the Double Doji Break – EURUSD 70 tick chart. (this may not be available on some trading platforms), however scalping does work on 1 minute charts (or 1 minute time frame if you can get it).
- Add your 20EMA line to the chart. Tip: Add 20EMA to your chart (Exponential Moving Average 20 periods)
- Good volume. When there is good volume the double doji is significant, because you should not see indecision. Tip: add volume indicator to your chart.
- An uptrend or a downtrend.
- During a pullback. If you see it appear in a pullback after a nice up or down trend, trade it, the market will continue on it’s original trend, especially if price is approaching the 20EMA line. (this is the most common time to see the DDB)
- There is no resistance lines or round numbers too close to our desired movement direction. (support lines are helpful though).
- RSI (relative strength index) line is showing an overbought or oversold condition, if you see double doji at this point, then it is ideal to trade. TIP – add the RSI oscillator indicator to your chart. Here is an article using the RSI
- After a long trend, the market slows and then the double doji break pattern appears.
- Technically the candle does not have to be a perfect doji, it just has to be close as to represent and indecisive candle.
The image above is not the greatest, but it is depicting an uptrend, the double doji occurs during the uptrend to ultimately turn into a pullback. The lowest tail is the setup, and when the next bar breaks the lower tail this signals the entry point.
When where and how to use the Doji?
Good question. What are the signals, right?
This strategy has a signal bar and and entry bar to help interpret your position.
The signal bar is of course one of the 2 or more dojis that you will see, in fact it is the bar that has the tallest tail on an uptrend, or the lowest tail on a downtrend.
The entry bar is one of the following bars that BREAKS the tallest tail on an uptrend, or it has a breakout of the lowest tail on a downtrend.
Take profit? Since we are scalping on a EURUSD 70 tick chart we won’t be greedy, 10 pips is our target. This strategy also works well with fibonachi lines to guide TP.
Stop loss? You can set it if you like, but understand that things are moving fast, so you won’t be going for lunch while in the middle of a trade, so try this without for a few trades and see if you are comfortable trading the double doji without a stop loss. Otherwise set a buy stop is placed 3-4 pip below the lowest tail of the doji, and the sell stop is placed 3-4 pips above the top tail.
Here is a scenario of trading the Double Doji…
You identify an uptrend, and most if not all the bars are above the 20EMA. Then you start to see a pullback heading down towards the 20EMA. You might be tempted to buy when the price touches the EMA line, but it would be wiser to wait for some sign that prices may reverse. So you now see the price dip below the EMA line, then come back up to form a doji, then you get a second doji. Now you wait for a following bar to go higher than the top of the tallest doji ,and BAM! that is your entry signal.
What is the downside of this double doji strategy.
There is a down side. It is that the doji is so common that you will see it a lot, and the hard part is identifying when a double doji is a signal or if it is nothing. The more you see the proper setup, the more you will not be fooled by fake signals. It is good to remember that the double doji is powerful and can be seen at the end of a pullback, or the end of a reversal.
This strategy is one of the basics that every binary options trader using technical analysis should know, and one of the best indicators. The double doji setup is based on trend reversal fundamentals. The first doji with the longest tail in the direction of the action is the signal bar, the following bar that broke the tail height is the entry bar. Supporting signals are RSI and 20EMA, but are not strictly required. And since it is a trend reversal, we really stay away from range type environment.
There is currently no metatrader downloadable indicator for the double doji strategy, but there are rumours of people creating one.
Please comment your experiences with this indicator.