Candlestick Patterns: The Doji and the Harami (Inside Bar)

Filed under: Learn Forex Trading |

 

A candlestick pattern that I have not really touched upon until now is the ‘doji’. Just so you can visualize it from the start, a doji can be seen in Figure 1. As you can see, a doji consists of a candle where the open and the close of the candle are at the same level or almost at the same level. A classic doji would also have very short upper and lower shadows, showing that the market has not really moved. There are dojis with long upper and lower shadows, but this tells us that the market is more volatile.

 

Figure 1.

Figure 1.

In the Japanese charting tradition, a doji tells us that the market is tired and in a state of indecision. While many people use dojis as a reversal signal and trade off of these, I personally do not. The reason is that it is a neutral signal, telling us that the market is in equilibrium. To me, it is neither a bullish or bearish signal, and the market could still break either way after having a rest. However, knowing what a doji is can still be useful, because it helps us to understand the narrative of a chart, and what is going on. Knowing that the market has gone from bullish to neutral, or from bearish to neutral, could help us to make trading decisions, such as moving up stops, or taking some profits.

Figure 2.

Figure 2.

 

The doji in the forex market is also generally contained within the previous candle, and as such, this creates another price action signal called a ‘harami’ (or an inside bar – see Figure 2). Haramis also show us that the market is stabilising, and could be about to change direction. I would trade a harami at a significant area of support/resistance on the breakout of the mother candle of the inside bar. However, this is not a setup that I often take as false breakouts often occur.

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