Trading With Doji Patterns
Trading With Doji Patterns
by Dave McLachlan
Trading with Japanese Candlesticks can be quite hard. Sure, they look pretty, and most newbies tend to gravitate towards candlesticks simply because of that. But I still remember my days as an apprentice – frantically flipping through Steve Nison’s “Japanese Candlestick Charting Techniques” – generally considered the bible of this method. No matter how hard I looked, I could not find an actual idea on how to trade with them. Sure it says “If you get three white candles in a row, this is a bullish sign”. Well (to put it bluntly) – duh! The market has already moved, and you just missed it watching the pretty candles form!
Over the years I learned to combine western and eastern techniques, and yes, I have found solid buy and sell signals (which I will show you here) not hazy “bullish” or “bearish” ideas.
Which brings me to the fabulous “doji”. As you probably know, there are many different kinds of doji. For those not familiar with them they are a single bar on your chart, usually with the open and close in the same place (or close to it). The ones I focus on have a long tail – for example they open high, have a long downward move, and then close high as well (and often have fancy names like “hanging man”, “shooting star” or “hammer”). But it’s definitely not the fancy names I am worried about – it’s how to trade them and make money. And to do that we need a visual on what we’re talking about – click the picture below to enlarge:
These types of bars also have a name in western techniques – the bull trap and the bear trap – called thus because they trap the bulls into a move and then take them out by reversing, and likewise for the bears. And while not every example I give will be exactly a “Doji” - for ease of use that’s what I will be calling them (apologies in advance to any hardcore candlestick enthusiasts).
Specific Entries and Exits Using Doji Patterns
So how do we trade using these patterns? It is very simple, but to understand how simple it is, we must understand what is actually happening when we see one of these bars form. The long downward tail of the doji tells us that there is a powerful buyer with enough money to move the market willing to buy stock at that level and push the market back up. And if there is a large buyer there, it is not a good idea to trade against him or her.
Knowing this, our entry or exit becomes clear and I’ll give you an example – let’s say we get a Dow Theory exit signal on a weekly chart, but the bar that gives us the signal comes back up and closes on its highs. Seeing this, we would not sell at our usual Dow Theory signal – instead the bottom of the doji now becomes our trigger point. This means that the market has to push past that large buyer around those levels and prove itself – and only then will we sell.
Let me give you an example on the charts below – making the market prove itself before entering both up and down:
Another Style Of Entry Using Bull And Bear Traps
Once we get this concept we can take it a step further. Let’s say we get the same scenario as above – a Dow Theory Sell Signal that comes back up and closes on its highs. We check the overall market and determine that it is actually heading upwards in the short and medium term also. Now, we start searching for a buy signal – and what better one to use in this situation than a trader’s trick entry! We set our entry point at the top of the bar, and our stop loss at the bottom of the bar, and get ready to enter if the stock moves up with the rest of the market.
Let’s see an example of how this would work – click the picture below to enlarge:
So there you have it – methods of selling and buying with Dojis (or bull and bear traps). I should note that both these methods work in up markets and down, especially as there can often be an entry either way the market goes (for the educated trader or investor).
If you are trading or investing for a living, you will know there is nothing worse than watching the market make a fantastic move while you’re there sitting on the sidelines. Knowing how to use Dojis or Bull and Bear Traps can give you more than one method of getting in when you need to – very useful if you miss your Trend Line entry but can go back and use this one to enter afterwards. As Warren Buffett said – “Diversity is a protection against ignorance” – so why not learn more to earn more? And this site is a great place to start.
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July 20, 2009
Tags: Enter and Exit Posted in: Free Trading Course Lesson Backlog
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