The Doji star bearish candlestick pattern is a commonly used trading pattern in technical analysis for identifying potential trend reversals. It typically occurs following a prolonged uptrend in a stock’s price.
Now, let’s delve into the meaning of the Doji Star Bearish Candlestick Pattern and explore how and when it is formed, using a practical example to aid our understanding.
UNDERSTANDING THE DOJI STAR BEARISH PATTERN
To grasp this concept fully, it is important to comprehend the meaning of “Doji” first.
Originating from Japan, the term “Doji” refers to a scenario where the opening and closing prices of a stock during a trading session are nearly identical. Consequently, the Doji pattern appears as a cross-like shape, with an extremely small or virtually nonexistent body.
The upper and lower shadows of the candlestick are prominently visible, lending the pattern its distinctive Doji shape. Please refer to the image below to observe the various types of Doji patterns that can emerge:
DOJI STAR BEARISH PATTERN FORMATION
The Doji Star Bearish Candlestick Pattern emerges within an uptrend and typically indicates a trend reversal. Let’s explore how we can identify this pattern to initiate a trade.
Step 1:
The first day should exhibit a green candlestick, affirming the uptrend and indicating that the closing price of the security is higher than the opening price. The initial image in the provided picture showcases a regular green candlestick, followed by a small Doji. However, it is also possible for the first candlestick to be a bullish Marubozu candle, where the stock opens at its lowest price and closes at its highest price, without any upper or lower shadows. The image below illustrates both a bullish and a bearish Marubozu candlestick.
Step 2:
On the following day, the stock should open with a gap up, forming a Doji that indicates the opening and closing prices are nearly identical. This suggests that after a prolonged bullish phase, bearish pressure is building up, leading to the formation of the Doji. It’s important to note that the Doji should be small, with the high and low prices not significantly deviating from the opening and closing price. A small Doji resembles a plus sign.
Step 3:
The subsequent day’s candlestick should open with a gap down, and its closing price should lie below the midpoint between the closing price of the first day’s candlestick and the opening price of the second day’s candlestick. This signifies a trend reversal and completes the formation of the Doji Star Bearish Candlestick Pattern. The pattern suggests initiating a trade in the opposite direction of the prevailing trend, in this case, taking a short position.
After entering the trade, it is advisable to set a stop loss at the higher of the high prices from the last two days. If the prices rise instead of falling over the next two days, the stop loss is triggered. This approach is particularly effective for intraday trading. One should monitor the 5-minute and 15-minute time frames to identify and act upon this pattern accordingly. To sell after the pattern formation, it is crucial to ensure that the closing price of the new candlestick forming the Doji Star Bearish Pattern is below the low price of the first candlestick, as this serves as a true sign and confirmation of trend reversal.
Now, let’s examine how a Doji Star Bearish Candlestick Pattern appears in an actual chart. In the provided chart, the pattern is highlighted in red, indicating its formation following a prolonged uptrend.