If you think you know all chart patterns in the markets, think again! Many folks are familiar with formations like the head and shoulders, double top, double bottom, and flags.
However, patterns that are less commonly discussed are the bullish and bearish Doji stars. Let’s look at both of these formations in more detail and how to trade them.
Firstly, what is the Doji star?
Before looking at the bearish Doji star (or morning Doji star) and bullish Doji star (or evening Doji star), let’s define what a Doji is.
Dо̄ji (どうじ/ 同事) is a Japanese term that means ‘the same thing.’ In the context of financial trading, it suggests that a market session has almost the exact open and close level. To better understand this concept, let us look at a normal Japanese candlestick with a different open and close price.
The image below shows a Doji star, which is typically a candle that looks like a cross.
Whether looking at a bullish Doji candle or a bearish Doji candle, each formation will have a tiny T or cross-like formation. You should distinguish a Doji from a spinning top. The latter has a slightly bigger body but sharp tails on either side like its counterpart. You can always zoom into your charts to distinguish the two.
Traditionally, the Doji represents indecision in the markets. It suggests there was no clear dominant force between bulls and bears. The price moved at relatively equal depth higher and lower but ended up closing at almost the same spot as it opened. This is why it produces an extremely thin or no body.
Bearish Doji patterns are reversal patterns that occur during an uptrend. On the other hand, bullish Doji patterns are reversal formations in the middle of a downtrend.
Generally, they are three-candle set-ups consisting of a full-bodied candle (or Marubozu), a Doji and another Marubozu pointing in the other direction. Here is an example of the bearish Doji star and bullish Doji star below.
Remember that we said a Doji is usually viewed as an indecision candle? This means we can also interpret it as a trend continuation pattern instead of simply a reversal. Such a duality makes it trickier to trade this formation compared to the others.
Yet, as with any set-up, context matters. It’s about combining multiple confirmation factors along with the bullish or bearish Doji star.
How to trade the bullish and bearish Doji stars
The one drawback of bullish and bearish Doji stars is they are neutral signals that lack the reliability of other patterns. A method of mitigating this risk is to look at higher time frames (from the 4HR and up).
This may be a problem if you’re a day trader but definitely not a swing trader, given that these individuals focus on noisier charts.
The second consideration with the bullish and bearish Doji stars is confluence, which means combining two or more distinct ideas/techniques in your analysis. These patterns have poor hit rates in isolation but are more effective when you factor in other things.
And what would these other elements be, you may ask? Generally, confluence in technical analysis may be points on the chart that converge perfectly with each other (e.g., a moving average near a key support and resistance zone).
- Support and resistance: This is a bread-and-butter approach to trading any reversal. Analysts look for common price action patterns like pin-bars, spinning tops and bullish/bearish Doji stars as entry triggers.
These formations tell a story that the market will likely move in a new direction when the price has failed to breach a certain level.
- Trend line: We can regard the trend line as diagonal support and resistance. However, it is targeted towards continuations instead of reversals. Here, traders look for the bullish Doji candle or bearish Doji candle patterns on the trend line.
- Moving average (MA): This is a tried-and-tested indicator for identifying trends. Like a trend line, you should hunt for the Doji on or near the MA.
Lastly, a disadvantage of this set-up is you’ll usually need a larger stop loss, especially on higher time frames. It’s best to enter once the third candle closes because waiting any longer will result in a bigger stop, reducing your potential reward.
We’ll look at real chart examples incorporating these concepts in the next for the bullish and bearish Doji star.
Examples of the bullish Doji stars and bearish Doji stars
Let’s look at three scenarios of this pattern, two for a continuation and one for a reversal. The first is a bearish Doji star on the 4HR chart of GBP/NZD. We have applied a 50-period MA on this forex pair for confluence.
We see the market spent a couple of days above the moving average before it went below it (near the ellipse).
This would have suggested a reversal, as the uptrend changed into a downtrend. The market then retraced close to the MA, where it printed a bearish Doji star.
This, along with the price being beneath the moving average, were two strong signs that the pair was likely to continue trending downwards. The market produced a lovely bearish candle. A trader would have entered after this point, with a stop loss above it.
The second example is on a crypto pair, the daily chart of BTC/USD. This time, we are looking at the bullish Doji candle version of the pattern.
Bitcoin was in a strong uptrend during this period (2020), as the price is above the 200 MA. At some point, there was a minor retracement. Although it was nowhere near the indicator, a bullish Doji star formed.
A Doji on a daily chart carries more weight compared to a lower time frame, given its rarer appearance.
The last illustration of this pattern we’ll examine is on the NZD/CHF daily chart. Here, we are studying the bearish Doji star in a reversal scenario.
We have two additional confirmation factors for this example. The first is the bearish divergence on the RSI, a classic reversal signal. The second hint is that the bearish Doji candle formed at the support level at 0.68850.
Conclusion: pros and cons of the Doji star
On the plus side, the bullish and bearish Doji star are patterns found across financial markets with varying degrees of success.
Yet, traders should be careful about this set-up. As mentioned previously, a Doji is a neutral indicator that doesn’t inherently cause a reversal or continuation. Secondly, given its unusual candle structure, it appears infrequently on the charts.
However, despite the drawbacks, it won’t hurt to include this bullish Doji star and bearish Doji star patterns in an existing arsenal of candlestick patterns.