A Little Lesson In Reading Charts: The Doji Candle

By BitcoinGordon | BitcoinGordon | 25 Jan 2022

You can call it a candle.

You can call it a doji.

You can call it a doji candle.

You can even call it that thingy with the chunky line and the little thingy that pokes out at the top or the bottom.

Gordon doesn't care about the semantics that get you through a trade more accurately, as long as you know what you're looking for and use it appropriately.

We use technical indicators to trade stuff. Before this becomes that loathing "traders are traitors" thing, let me be clear; even if you think that people who trade instead of (or, in addition to) the sacred rites of the HODL, realize that a little trading skill can help every single person accumulate at a better point in the market, getting the maximum value from their stacks.

The candle, or doji candle, is one of the most universal indicators for market movement, as much as volume or actually viewing the order book. Almost every exchange will have at minimum, candles and volume loaded to show you what's going on. But, the beauty of any great indicator is its ability to provide an extremely simple, seemingly low level of cranial input to visualize a ton of market variables taking place.

The doji candle goes way, way, way back, and roughly translates to indicating something wrong, fixing something and making it right, or, as we interpret it more accurately at market; a correction. We are using the visuals of the candle to tell us when a correction is going to occur. That's the idea.

Red Light. Green Light.

The first thing we can gather from the candle is very simple; is it red or green? Now, in some markets the standard is red up, green down, but in most markets green means up, red means down. Adjust your understanding of the underlying meaning of color-coding appropriately. Since I'm in Western culture zone, typically green means good, more money, or "go", and red means bad, less money, or "down". I know this is incredibly simple, but you'd be surprised the 'assumptions' that get people all tied up in knots.

When a Thing Is Wick

Anyone who knows the reference wins the prize... or just Googled it in which case there is no prize... in either event... no prize.

The next thing I'd like to explain is that candles have a wick, which I would venture to guess has a lot to do with why we are calling these things candles, as opposed to rectangles with little line-thingies. A wick is where we are given a sign of a reversal, or a 'fixing the thing that is no longer right'. To make it simple, both the length of a candle's wick and the direction of the wick are valuable data being expressed.

Sometimes the traditional name for candle and wick is the body and the shadow. I prefer candle and wick. You call it what you want.

Watching doji candles live will show you the direction of price action as it directly relates to volume, or the amount being purchased at the given time, and most people aren't fully aware of this. For any active, high volume asset, you're going to see a lot of visual movement up and down, representing how big the candle gets and how long or short the wick becomes. This can change multiple times/second if it is an active order book. 

In the most technical sense of the word, the wick of a doji candle is indicating the direction of price action at the open and close of a particular period of time. The way that the candle appears is going to depend on the length of time you select. Most exchanges provide a standard "TradingView" default visual that can be edited, giving you as short as a 1 minute candle and as long as a day or even a month or year. Live data is added to the visuals no matter what, but if you are looking to interpret what the direction of the wick is telling you, you will want to watch at least one of the shorter durations before making a buy or sell decision based on it.

So, lets say that you are looking at a 1 minute candle for the purpose of seeing what I am describing. At the start of the one minute, there will be a rectangle, and there might be a wick. Wherever the wick is first visualized, that is the open of the candle duration. If you see a neutral or semetrical balance of candle and wick at some point in that minute, it means it has reached a neutral point, returning to exactly where the reading was when it opened. By the time the minute closes, it will either be at a higher, lower, of same value as open, and the direction of the wick will let you know.

If the wick goes away within the time selection, it means that the volume of buys or sells has reduced to the extent that it is not causing a readable price action in either direction.

Usually, you will see a direct correlation between the direction of the wick and the color of the candle. If the price is going down compared to the candle open time, the candle will turn red, and this will reverse if it goes up beyond the opening value. When you see more and more buying power accumulate well below the current price and/or the price is going down, the wick will become longer and the candle body will start to extend downwards. Depending on the specific price action, the body may even overtake the wick is heavy selling takes place. At that point in time, the viewer can keep watching until it appears the candle is about to change directions.

Obviously, the most obvious change in sentiment is going from red to green or vice versa. If the price has a ton of activity in both buy and sell sides of the order book, you will likely see a lot of very fast shifting from red to green and this may take a long time to resolve before one direction or the other becomes more dominant over the time duration, but the progression is almost always that it will eventually start to develop a clear trend one way or the other.

At the end of the day

When the time duration selected is over, this is the "close" and at that time, wherever things ended up, that candle will now be a permanent record of how things resolved for that little piece of history. What many who analyze historical data in markets and do not do any live trading, they are missing out on the most important elements of the indicator itself, which is the movement taking place, but it is a great record of events past, to analyze long there are green or red patterns, and how often, thus, a timestamp ended in the red, or green. These patterns line up to give us even more data about what may occur in longer future trends, based on historical statistical data. Even deeper, patterns become generalizations about markets when comparing the doji patterns from one asset to another, or entire groups of "types" of assets in certain bundles. In crypto, for instance, someone might analyze new tokens issued compared to longer old faithfuls, or utility coins compared to "what we used to refer to as" commodities, or DeFi coins and platform, or exchange issued coins.  

There is a lot more to understand about doji candles, but these are the main elements to understand, and this should help you use the candles as an underlying instinct in your trading decisions. If the wick is starting to appear at the bottom of the candle and the candle is starting to turn red, it's going to likely start going down more and more, at which point you can keep watching the wick's length and candle's length as a sign for when, and how low it is going to drop, which is a benefit to entering a position at the dip. Reverse all of this for the truth about when it may be reaching a good point to sell.

I hope you found this interesting, or helpful, or both!

Thanks for reading, and as always, for now, Crypto Gordon Freeman... out.



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Hi! I'm Gordon Freeman (I hear they made a likeness of me in some video game... totally unrelated... or...).


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