Doji candlestick trading is probably one of the simplest ways to make money with either stock or foreign exchange trading. Trading systems based on candlestick charts can be easy to implement and yet extremely effective.
Doji candlestick strategies use the chart without too many other indicators. The doji leaps out at the eye very clearly so you can see your initial trading signal at a glance.
Of course, you would then look across the previous candles to check that the market is in the right position for a trade. We will cover that in a moment.
Finally, you would normally check against at least one other indicator before actually opening a trade. However, much of this can be done very fast. This is a big advantage in day trading, and it is a day trading strategy known as doji reversal that we will be looking at here.
So first, identifying the doji. The doji candlestick marks a period where the open and close prices are the same. This means that there is no candle body, just the two wicks to the highest and lowest prices, plus a horizontal line at the open and close price.
Therefore the doji is in the shape of a cross. It is normally a sign of indecision or reversal in the market. It occurs frequently in a very volatile market and is not so useful then.
However, when it occurs in an upward or downward trending market it can predict retracement or reversal, which the trader can profit from.
When a doji candlestick is spotted in the market, first look back to see whether there has been enough movement for you to profit from a retracement.
A retracement may only be about one third of the distance since the last low. If that gives you enough space to cover your spread and allow for a little slippage, you can go on to step 2.
Step 2 involves checking an oscillator to make sure that the current price is shown as overbought or oversold. Either the RSI (relative strength index) or MACD (moving average convergence/divergence) can be used for this purpose. An overbought or oversold market plus the doji is a good indication that you can get involved.
You can also look at the trading volume. If trading is trailing off, then this is another sign that a reversal might be about to occur.
When you open a trade, be prepared at first for a retracement. Either set a limit order at the point that you would expect a short term retracement to reach, or watch and do this manually.
At that point, you might want to close just half of the trade. With the other half, you could move the stop to a no-lose position close to your opening price, and let it run in case a major reversal occurs.
Of course, there is always a risk, as with any form of speculative trading. You do need to know what you are doing and this kind of trading requires a lot of practice, even though it is a simple system.
Therefore we recommend trying out these doji candlestick trading strategies in a demo account so that you know how to operate them successfully before going live.
