Doji candlesticks look like a cross, inverted cross or plus sign. Alone, doji are neutral patterns that are also featured in a number of important patterns. A doji candlestick forms when a security's open and close are virtually equal for the given time period and generally signals a reversal pattern for technical analysts.
There are two main forms of technical analysis: fundamental and technical. Fundamental analysts concentrate on measures that have to do with business performance such as sales and net income. Technical analysts, on the other hand, concentrate on patterns in the stock price. If the stock price is going up, it might be a sign that prices will continue to go higher and vice versa.
Technical analysts believe that all known information about the stock is reflected in the price, which is to say price is efficient. Still, past price performance has nothing to do with future price performance, and the actual price of a stock may have nothing to with its real or intrinsic value. Therefore, technical analysts use tools to help sift through the noise to find the highest probability trades. One tool that was developed by a Japanese rice trader named Homma from the town of Sakatar in the 17th century, and it was made popular by Charles Dow in the 1900s: the candlestick chart.
Every candlestick pattern has four sets of data that help to define its shape. Based on this shape, analysts are able to make assumptions about price behavior. Each candlestick is based on an open, high, low and close. The time period or tick interval used does not matter. The filled or hollow bar created by the candlestick pattern is called the body. The lines that extend out of the body are called shadows. A stock that closes higher than its opening will have a hollow candlestick. If the stock closes lower, the body will have a filled candlestick. One of the most important candlestick formations is called the doji.
A doji, referring to both singular and plural form, is created when the open and close for a stock are virtually the same. Doji tend to look like a cross or plus sign and have small or nonexistent bodies. From an auction theory perspective doji represent indecision on the side of both buyers and sellers. Everyone is equally matched, so the price goes nowhere; buyers and sellers are in a standoff. Some analysts interpret this as a sign of reversal. However, it may also be a time when buyers or sellers are gaining momentum for a continuation trend. Doji are commonly seen in periods of consolidation and can help analysts identify potential price breakouts.