No, they’re nothing to do with martial arts, but these candlestick formations can give your charting a kick-ass edge.
Chart candles come in all shapes and sizes, but there’s a certain kind that it always pays to know more about. Doji candles are a kind of candle with almost no body – that is, price opens and closes very close together. There may be long or short upper and/or lower wicks.
Dojis typically signal indecision or reversal in the market. The kind of doji, and where it comes in a trend, can strongly indicate where the market is likely to go.
For a full run-down of dojis, the different types and their significance, we recommend BabyPips’ pages on them. For now, we’ll whet your appetite by giving a specific example and explaining why it’s a big deal.
Dojis can occur on any timeframe but we’re going to look at the one-hour chart for Friday 17 May. You can see the data range here.
You will immediately see the doji on this chart. It’s the third candlestick, and it’s what’s known as a Bullish Hammer Doji. You’ll see the short ‘body’ of the candle, with a long wick or shadow down. The candle is red, but this doesn’t matter much with dojis.
Here’s what it means. Within the space of that hour, sellers flooded the market, crashing the price of bitcoin by over $1,000. But buyers then rushed in, picking up cheap coins and pushing the price back up to where it started. You can see that the volume bar is high. Three times as many BTC changed hands in this one hour than for any other hour that day. This means the move was powerful and decisive.
What this all means together is that panic sellers were no match for the bulls. There was plenty of demand at the lower price, and so BTC bounced. This is a highly bullish candle, and a strong buy signal. You can see that the market stabilised quickly afterwards in the $7,000–$7,200 range, a thousand dollars higher than the bottom. Then it moved up again another $800.
The Bullish Hammer Doji showed where the bottom was, and the likelihood that bitcoin would not be dipping that low again in the near future. If you’d tried to buy the bottom of that move, it would have been like catching a falling knife. But if you’d bought the top of the doji when the hour closed, you still would have done very well out of it – and your risk would have been low.
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