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Michael C. Thomsett is a widely published options author. His "Getting Started in Options" (Wiley, 9th edition) has sold over 300,000 copies. He also is author of "Options Trading for the Conservative Investor" and "The Options Trading Body of Knowledge" (both FT... More
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  • Candlesticks – The Doji Star And What It Shows 0 comments
    Mar 15, 2014 12:56 PM

    A doji star is an unusual but very strong reversal pattern. It consists of two sessions, a setup day followed by a signal day. Because it contains a strong reversal move as well as a gap, the indication is exceptionally reliable, whether used as a primary or a confirming sign.

    Both bull and bear doji stars will be found; both varieties are shown in the illustration.

    In the bull version, the first session is downward moving and in a true doji star, should be quite a long candle. The long black candle is usually associated with bearish trends, but what makes this one so strongly bullish is what happens next. The strong downward gap leads to the doji. The doji, looking like a cross, has opening and closing prices that are identical or close together.

    The doji represents a struggle between buyers and sellers. The fact that the doji follows a long black candle and then a downward gap demonstrates that sellers are not able to continue the downward momentum. That is what gives this two-session pattern such strong bullish value.

    The bearish version of the doji star is the exact opposite. It begins with a long white candlestick session, which is usually associated with a bullish move. Then an upward gap leads to the higher doji star. In this instance, it starts out looking like buyers are in command; the long while setup shows this. However, after the price gap, bulls are unable to keep the trend going, so this pattern signals loss of momentum for buyers and a likely reversal in which the bears will take command.

    When you see a bullish or a bearish doji star with exceptionally wide gaps and then long extensions on the second day, the signal is quite strong. This is especially true for the lower shadow on the bullish doji star and the upper shadow on the bearish variety. Each of these demonstrates that the prevailing side (bears in the bullish doji star, and bulls in the bearish doji star) were not able to take price in the desired direction. This normally tells you that the other side takes over, although the pattern might be followed by a brief period of sideways movement. This often occurs at the crossover between the two sides.

    Be cautious when relying on the doji star, however. Failed signals are common, so when you see this develop, you need to seek additional confirmation before acting on the signal. This may come in the form of concurrent failed testing of support (bullish signal) or resistance (bearish signal) as part of the doji star pattern. The doji (or, as swing traders like to call it, the narrow range day) may also be accompanied by a volume spike, a very strong reversal indicator. If the doji star is followed by price gaps in the indicated reversal direction, that is very strong confirmation that a reversal has actually occurred.

    To gain more perspective on insights to investing observations and specific analysis, I hope you will join me at ThomsettStocks.com where I publish many additional articles. I also maintain a virtual portfolio of stock at ThomsettStocks.com. For new trades, I usually include a stock chart marked up with reversal and confirmation, and provide detailed explanations of my rationale. Link to the site to learn more.

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