While you may (or may not) already know what candlestick charts are all about… and more specificially what a ‘doji’ is, the real question remains, do you know what it all means?

But before we get into all that, let me first answer the question that started this all, “What’s a doji?”…

A ‘doji’ is a term used by technical based traders (people who read charts) who use a specific style of charts known as “Candlesticks”.

Candlestick charting is a method that has been used by Japanese traders, and was popularized by Steve Nison.

A candlestick basically looks like this:

The high and low are at the extremes, sometimes refered to as the ‘wicks’, and the open and close form the ‘body’. The body is either colored or shaded to indicate whether the close was higher or lower than the open.

For example, the candle on the left is unshaded, meaning that the market closed up. Specifically the market opened at ‘2′ and closed at ‘1′.

The candle on the right closed down and is shaded black. It opened at ‘3′ and closed at ‘4′.

This is a very basic form of a candle. They can vary and have no wicks (when the high and low of the day coincide with the open and close of the day), just one wick, very short wicks or very long ones… bodies can vary as well.

Now the doji refers to a specific pattern formed when the open and close of the day are essentially at the same price. This makes the body a horizontal line versus a filled in body. So the pattern looks like a plus sign, with the top of the plus sign being the high of the day, and the low of the plus sign being the low of the day. And the line through the center being the matching opening and closing prices.

Now you can go out and probably do a Google search and find dozens of candlestick charting terminology… or hit your local library or bookstore to find the all time “bible” of candlestick charting by Steve Nison.

The one lesson I want you to get from this article is that in addition (or besides) just learning that when you spot a particular pattern (let’s say a doji for example) instead of just mechanically saying, “This must be indicating that the trend is coming to an end”, interpret what the pattern is actually saying.

If you stop to think about the open and the close having the same price, with a fairly even high and low, what does this mean?

Without going and finding someone else’s reasoning, take a moment to consider it.

Why?

The process of being able to read charts is not so you can robotically match patterns, but so you can match patterns AND interpret what is potentially going on. Because as I stated in the previous article, context is just as (if not more) important than the signal you’re analyzing.

By learning to ‘read into’ the messages that the chart is presenting, you will begin to grasp the bigger picture that someone who just isolates patterns will miss. And it’s by learning to combine the context with the pattern that can take your trading to another level.

Continued Success!

Ray

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