How to correctly use Doji candlesticks to spot a reversal?

The occurrence of a Doji candlestick is often regarded as a sign of a potential reversal. However, other times it is actually just a brief period during which bulls/bears are catching their breath - after which the initial trend resumes. What other signs are there that a doji signifies that a reversal is about to occur?

If the dojis occur in prior areas of supply/demand, this can significantly improve probability of a reversal.

But as the screenshot demonstrates, nothing works 100% of the time. Here we see maybe 7-8 'reversal' candles (area B) that all occurred in an area of supply created by candle 'A', yet price broke further upward before eventually reversing.

Thank you for your response. From what you've said, I be inclined to start believing that doji would be better used as confirmation of other forms of analysis. I mean, it would make better sense to use area's of supply and demand to spot opportunities which may then be confirmed with candlesticks such as doji, than the other way round (using doji to identify reversals and then apply concepts of supply and demand to confirm the signal given by the doji). Would you say that this is true?

Aside from that, does use of supply and demand (S/R) fall under the category of price action trading? I've always been slightly unsure of what 'price action' actually refers to; I used to think it just meant the use of candlestick patterns.

Also, I like the way you seem to have used the upper wick of one of those doji to create an area of demand (resistance). I might try to use that for myself... It seems to have worked well here:

Hi,

"Price action" is a bit like "orderflow", at least in the sense that they can mean different things to different people. The James16 trading approach has been widely described as "price action". If I had to describe it in a single sentence, it's about candles that show rejection from key price areas, preferably on longer timeframe charts.

If you like the supply/demand idea, there's a wealth of free info in Alfonso's post #1 (see link in my previous post). Also look up Sam Seiden on FX Street, as he is considered by many to be the doyen of S/D trading. From what I've read, much depends on the velocity with which price exits a S/D zone, rather than the precise candle type. (At the end of the day, candles are nothing more than the OHLC prices between two arbitrary cut off points).

In the attachments in Alfonso's thread you'll find a MT4 indicator 'II_SupDem' that was written by Bredin of Insanity Industries (great name for a company, LOL). This plots S/D zones on your chart automatically, although perhaps not exactly according to Sam's rules, but it's a time-saving starting point. One thing to be aware of is that when price breaks through a zone, the zone box on the chart disappears (a kind of re-painting), hence the indicator tends to look better than it really is.

The attached screenshot (NZDUSD, M15) shows an uptrend, with two retracements into demand zones — points A and B — that provide excellent low risk buy opportunities (price is currently up around 130 pips, thanks supposedly to the RBNZ increasing interest rates, and maintaining a hawkish stance). Of course the trick is to spot these situations in real time, as everything is easy in hindsight LOL.

One possible approach muiht be to pick a pair that is trending strongly, find out what economic factors (mainly Central Bank dialog/action — I learned a lot from these free videos) might be driving the move, and then using S/D zones as possible low risk entries. If zones of the same type overlap on multiple timeframes, then the odds should improve accordingly. Just an idea to experiment with.

Please note: I'm a retired programmer, not a pro forex trader.

Good luck.

David

"From what you've said, I be inclined to start believing that doji would be better used as confirmation of other forms of analysis."

That's good thinking, I've seen Dojis everywhere fail, by itself it really doesn't say much, for instant in an uptrend, price action can go down, and come back up, and the trade can resume going long, or the candle can go up then close back down, and head south, the most interesting thing is that even if it close down that doesn't mean that the market is weak either. It takes skills to know the difference, and like you said you should use some other form of analysis, it's the reason why I trade orderflow in the first place, I don't have time to sit and hope.

I've spent years working on perfecting methodology that would allow me to use a vast array of market information to pick tops and bottoms...at best...they are coin toss stats....

Picking tops and bottoms in market is a fools game.

It can be done, but the road is long and treacherous...and when all boils down, there are a lot easier ways to make money.

Understanding candles can boil down to the time frame that you trade, the range you see as profit and your personal perspective of market.

HOW patient are you?

A lot of us have all had the same journey...studying the charts, reading up on market, working to understand methodology, indicators, price action, money management.................................................................some of us, have managed to keep in market for a long enough time to actually know that there is not perfection and that standing in front of a speeding train or catching falling knives isn't a really great idea.

So...

Try to conceptualize the data, in laymans terms as to what a candle is actually saying.

When a candle closes higher than it opens...there are buyers.
When a candle closes lower than it opens...there are sellers.

Happens on all time frames and no, I am not trying to insult your basic intelligence...I am trying to break things into the most simplistic possible ways...this can be the key to your continued success in market.

Now...we can spot dogi candle patterns, dragon flys, crosses and inverts....we can even look for pinbars...these can all classically be signs of reversal and when we look at a chart in hindsight, the seemingly dictate the tops and bottoms of charts.

But!!!

Have you looked for these same things to happen in the middle of trends?

Spoiler alert...they do.

There are a lot of classical head fake patterns and the more we study, the more confused we can actually get.

I been there...I know...I've seen others take this path...they too will attest to this fact...

So...what inside of "CANDLESTICKS", can you look for?

There is a lot to actually see and say before you even get to this point. What do you consider reasonable profit to a risk of reward? What is the time you have to commit to your trading? What is your level of patience?

If you look for candlestick patterns on the M1 chart, they happen all the time...so much so, that you will get to see that there is more noise than actual information...but ask yourself one question. HOW does the M1 chart differ from any other?

The answer here...it doesn't.

So...if you cannot find what you are looking for in the fast frames...there is no reasonable expectation that you should be able to do the same with any other period.

Sure. Sure. You can apply Fibs, trendlines and horizontal lines...but this too takes a lot of practice and can give a lot of mixed results before you ever get it right...and when you get it wrong, it just gets frustrating....

Why am I going through all of this seemingly worthless bullshit? Well...actually leading some place.

The market is somewhat of a fair place. Not necessarily to all traders, but more so to the MARKET in general. Meaning...all relevant sessions will have a chance to buy and sell the same areas.

Look at it like this. If you have sold 10 apples that you didn't have...you now have to buy 10 apples to cover your sales. You've either sold them apples at a profit or sold them at a loss. This is your individual trades. But after you have won or lost, the rest of market will get an opportunity to buy and sell them same apples. It is the market balance.

Not helping....is it?

Again...not trying to insult your intelligence...just trying to break things down to the absolute basics.

You've asked a question, because you want to learn. You want to expand your knowledge. You want to find more prosperity in market.

It ain't always that easy and it may not always be there, where you have the time to commit.

So...you have to train yourself and ask the REAL question...What am I looking for?

The answer isn't in a Doji. Isn't in a Doji when the stochs has bottomed or topped. Isn't a doji when there is a full moon signifying the summer equinox...

But...the answer can be found in a candle...or rather a series of candles.

Now...look at a chart of candles. M5 candles. Can you see where the buyers and sellers are?

If you've answered yes to my previous question...it is because you can see where price went up and where price came down.

Absolutely fantastic if you have a time machine and can go back and buy or sell at the same prices...

OH, if only....

But...what if you could?

What if you could see where the previous buyers/sellers were and assume the same trades?

Shit!!

That'd be kewl, wouldn't it?

Well..ya can.

Remember what I said about market balance...and everybody getting to play the same money??

It sounds like convoluted bullshit, but in actuality, it really isn't.

A few simple terms to keep in mind...

When support is broken, it gets tested as resistance.
When resistance is broken, it gets tested as support.
All sessions will have a chance to play the same money.

Now...have a look at a chart.

Look specifically at the line I have put on the chart and notice how price has bounced off of this line...

Kinda looks like I am telling you where to pick tops n bottoms, hey?

I guess I kind of am...

Why?

Because if we have a look back historically and apply a larger time frame...

We can see really where the buyers are.

Check it..

And check it again!

Longer time frame and a larger frame of reference.

Hey magix what is the date of the last chart, I want to add what is going on there so he can understand better, Maybe I am in a good mood today, money can do that to you

Oh yeah, buddy...

I know it!

Everybody can do this shit in hindsight...but how many can do it in fore?

The FACT is...

Not a lot.

You know why?

People and maybe even yourself, are more concerned with looking at bullshit news and indicators and reading other peoples analysis...

This is the shit that we fill our time with, when we are either stuck in a trade that is slowing robbing us of funds...or when we are holding green and have fingers crossed that it stays green...

When you educate yourself from the fast frames, you can gain an absolute appreciation for every single Minute of the day that you are trading.

When you trade off of longer time frames, it becomes increasingly harder to do.

Shit...we are a society inundated with information and distractions...do you have any idea how hard it is to just stare at a chart and a chart only...watching each little candle form in the fast?

It's a pretty tough gig.

Specially, when you see others posting shit and running their mouths and fingers to the bone here at FF, or other forums, or chats or where ever...

It's tuff because internet pr0n is infinite...the sun is shinning...the beer is cold...the wife doesn't have a headache...the dog needs a walk...the fence needs some paint...the kids are screaming...it's your mothers birthday..............

You get the point...

Thing is...we all have to live. If we don't, what does it matter if we can succeed in market by any methodology, or just throw in blind trades and hope for a lottery winning type payout?

What does it MATTER?

Well...you're here.
You've asked a question...

The information is available...

Are you willing to see what the market can offer to you in the time you have available with an account you can afford to gamble with?

That is the real question.

Seriously dude...

If you cannot see that these are current...you have bigger questions to ask yourself.

Lol I don't trade on charts so I had to go see for a sec. But yea I spoke about that area a few days ago, it's the super support that was created by the CHF buying on Jun 5. that 1.35 line is no joke, even looking at the price action now, it seems the price just don't want to go down anymore. I have seen 3 trades that would have went short anywhere else that was rejected easily, so My money is on that line holding. Lol I don't trade technicals anymore but from looking at the chart the amount of CHF that was bought on that zone was truly amazing. Either way it goes I am on it though, but If I was trading technicals alone, I would buy at support everytime. But Like I always say, I don't know anything so take everything I say with a grain of salt

for the sake of simplicity I separate bars is trending and range bars, I consider a doji is a range bar, so I will sell the high and buy the bottom......sometime I will sell the bottom if appears at the top of a bigger range, all need to be viewed in contest.....if it appears just above a large bull trend bar...indicating a pause, I will enter above the doji with my Sl just below it for at least a scalp........a small bar with a close above the open and very little wicks at the top would be better....but in trading nothing is black and white..

Check the chart.

Here we have the perspective of an M5 chart, with the hourly candles superimposed.

Really...kinda makes these lines seem a lot more relevant...doesn't it?

So...

You see this support...without the use of dojis and you buy...

Kewl story right?

Is market really this easy?

Market can be this easy...but you need to have an appreciation for the simple terms...

IF support is broken, it becomes resistance.
IF resistance is broken, it becomes support.

You've bought what seems to be the most obvious support and it falls...

Pshhhhhhhhhhhhhhhhhhhhhhhhhhhhhhh

Shit happens.

Your idea of support and the market idea of support has become a completely different reality...

So...again...this is where you define yourself as a trader.

Do you wait for support to get tested to exit?
OR
Do you cut bait and swim?

Ya see...these areas can be violated in ways you cannot imagine. Do you have the Frame of reference, the margin requirements, or the patience to hold through the storms?

Or

Would you prefer to just cut the loss...admit the current defeat and sleep well through the night?

The market holds gains that a lot of people can only dream about.

It can offer a paycheck that others cannot earn in a day, it a mere matter of moments.

Ya ever trip a $100 pip?

Fuck Me!!

Go from where you are...and then step back on loss...and then forward again on confidence....only to have to go back again....

This is the inevitable ride you are taking.

Ups and downs...real to demo...prosperity to picking your cigarette butts at the bus stops...
(might be a little extreme, but a true possibility and probability)

With each of these levels you survive...it becomes an adventure video game...not like the shit kids play today...more like the stuffs I grew up with. It just keeps getting harder and faster until you die...there is no win or lose!

Finding the balance you need, is part of what establishes you and defines you as a trader!

Nothing more...
Nothing less...

A good week can still be crushed by a single news event.
The best traders still lose trades.

Gain the perspective that there is no perfection and do the best you can from there!

Aight...

So, now that support has been lost...

Maybe you are bagging some luggage in loss...maybe you just want to gain a couple shekkles back...

What do you do?

Do you trade back, under the assumption that market is going to obey the supply/demand rules?

Will support really get tested?

Can you actually win a counter trend?

Dunno....

I don't know where your level of patience is...but what if you have the chart...you have the idea...and you have taken the chance.

Instead of waiting to sell when price comes back to resistance and looking for your doji...

You decide to play the line...

CAN IT BE DONE?

Truth is...

It can be.

You can buy into a selling trend.

You can sell into a buying trend.

Doesn't mean you will prosper on the trade...but you can do it...

What would happen, if you just decided to set stops below support?

Reasonably...

Now, I say reasonably, because if you go through the active trade threads at FF, you will see random fucking orders with obscene profit ranges and even more obscene stops...

Keep in mind, you are surrounded by others who also have no idea how to work in market.

Buy, SL 10, TP 4000....

You have a new perspective...you see that we are falling and no actual support line is built...you know that it is an order that will easily be consumed...

Shrug your shoulders.

Appreciate that you are no longer, "THAT GUY", and wait it out. Take a walk. Tend to the children. Surf pr0n...do what ever you need to do, to just simply not be one of those guys!!!

When you are hip high in confusion and there is only a tale of woe....consider your profits earned, by not losing money!