Doji Star candlestick pattern is a warning that the current price trend is close to a reversal. In order to state the appearance of this pattern, it is necessary to form a candlestick with a long body, the color of which reflects the current trend. Further, the next day, the opening and closing prices should be equal. This weakness for the current trend is cause for concern. The well-defined Doji Star signal is an excellent example of the Japanese candlestick charting method. The signal would not have been so clear if we had used a different method of graphical analysis.
Fig. 1. Graphical example of bearish and bullish Doji stars
Formation rules for the Doji Star model
Let’s summarize the above:
- On the first day, a candle with a long body should form;
- The second day is the Doji candle;
- Doji shadows should not be too long, especially in a bullish case.
If speak about bearish doji star, then the situation unfolds as follows: first, an upward trend dominates the market, and this is confirmed by a strong white daily candle; the next day, trading is carried out in a narrow price corridor, and the session closes at the same level at which it opened, or very close to it.
This almost completely undermines traders’ confidence in the previous rally. Many positions will be changed, which gives rise to the Doji candlestick. You can also add that if the next day’s close is below the level of the Doji Starthen this will clear the way for a trend reversal, confirming the signal.
Nuances of identifying the Star-Doji candlestick pattern
Very often after the close of the first day in the main trend and before the formation of the Doji star there is a price gap. If the gap also covers the shadows, the trend reversal is even more important. In this case, the color of the first day should reflect the trend direction. The proportions of the shadow and the body do not matter: the day can be volatile, and therefore the shadows can be long, but, most importantly, the equality of the opening and closing of the candlestick.
An example of the formation of the Star-Doji candlestick pattern
Figure 2. An example of the formation of this candlestick pattern on the price chart.
Perhaps one of the brightest examples of the formation of the Doji-star candlestick pattern with a change in the direction of price movement. After a long growth, the price was trading in a narrow range, with the same opening and closing points of the trading day. The next candlestick was bearish, which gives a good reason for identifying a reversal movement. Later, the course of the price movement confirmed these conclusions.
You can see in the figure the formation of another Doji star before the reversal and the candlestick pattern we are examining. After this Doji pattern, the price continued to renew highs, so we did not enter into a deal. But this first Doji Star pattern gave us a clear signal of the likelihood and imminence of a trend reversal.
About other important chart patterns on the market