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Trading the Doji

Trading the Doji

Richard Krivo, Trading Instructor

Instructor's Response:

You are correct that the doji implies indecision. It also indicates the potential for a change in direction.

When a trader sees a doji, they would look to determine the direction that the pair was moving prior to the formation of the doji. If the pair was moving up prior to the doji appearing on the chart, we would be looking for a reversal after the doji. The opposite would be true if the pair had been moving down prior to the doji. This change in direction may not occur but if we get stopped out, the loss will be minimal based on our trading plan.

Take a look at the chart below...

This EURUSD pair had been moving down prior to the formation of the doji. So, when the doji closes, we know that it represents the potential for the pair to move in the opposite direction...to the upside. At the open of the candle following the doji, a trader can take a long position with a stop, as indicated on the chart, below the lower wick of the doji.

Again, all trades based on dojis will not work out but with a prudent Risk Reward Ratio, we can put the longer term trading probabilities in our favor.

Also, anytime a doji signals taking a trade in the direction of the overall Daily trend, that will be a higher probability trade.

chart 1 12 10

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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