From the March 2014 issue of Futures Magazine • Subscribe!

Top 5 candlestick strategies

DOJI

The doji is one of the most important candlestick patterns. A doji formation is a single-candle pattern. It occurs when prices opened and closed at the same level. A doji represents equilibrium between supply and demand, a tug of war that neither the bulls nor bears are winning. Traders should not take action on the doji alone. Always wait for the next candlestick to make an appropriate trade.

After a long uptrend, the appearance of a doji can be an ominous warning sign that the trend has peaked or is close to peaking. The converse holds true for a downtrend. When assessing a doji, always take careful notice of where the doji occurs. If the security you’re examining is still in the early stages of an uptrend or downtrend, then it is unlikely that the doji will mark a top, but it could precede a pause in the current trend move. It can be viewed as a pivot. 

“Top marker” (below) includes an example of a successful doji pattern. As shown in the daily chart, the S&P 500 started its rally from June 25, 2013, reached a high of 1709 on Aug. 2, and then on Aug. 5, the index opened at 1708 and closed at 1707.41. The open and the high were almost the same, which are the qualifications for the doji candlestick pattern.

Confirmation of a new downtrend came on Aug. 6 when the S&P 500 broke the Aug. 5 low of 1703 and closed at 1697.3. A reasonable stop loss could have been placed at the Aug. 5 high of 1709. 

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