Mastering candlestick theory is crucially important if you want to improve your market timing skills as a trader. In this article, we are going to talk about one such pattern that can help us achieve this: the double doji candle pattern.
Along the way, I will show you how to spot this pattern, its different variations, and how to utilize it in your trading strategies.
Double Doji Candlestick Pattern Meaning
Put simply, the double doji pattern consists of two consecutive doji candlesticks. In other words, it resembles two candles with the same opening and closing prices one after the other.
In technical analysis, a single doji reflects market indecision, as neither the bulls nor bears are in control of the trend at that moment. Because of this indecisiveness, a doji represents a temporary trend pause and a potential precursor to an imminent trend reversal.
Therefore, when you see two consecutive doji candles, you know there is serious uncertainty about the underlying trend and an even stronger reversal signal than a single doji on its own.
Essentially, the first candle in the double doji pattern signifies market indecision, while the second doji candlestick verifies this indecision.
How to Spot a Double Doji Pattern
Now we know what a double doji pattern is, how can we spot it in practice?
Pretty simply, actually!
Remember, a double doji is just two doji candlesticks next to one another. Therefore, all you need to do is find two consecutive candles with long wicks and small/non-existent bodies.
There is a slight nuance, however…
It turns out that a double doji can consist of any combination of four different types of doji candlestick patterns:
- Doji
- Long-legged Doji
- Gravestone Doji
- Dragonfly Doji
However, I will keep things simple and only concentrate on pairs of the same type below. As you will see, these present cleaner interpretations about price action.
Note, there is another doji candlestick called the four-price doji, however they are so rare that I exclude it here.
Doji
The first of these pairs consists of two standard doji candlesticks, which have equal-sized upper and lower shadows.
Due to their appearance of a star, each of these dojis are sometimes referred to as a doji star. They are generally seen as the most neutral of all the doji candles, as the closing and opening price are equidistant from the highs and lows of the candle.
In other words, buyers and sellers were engaged in a pretty even fight throughout the day until settling back down to where they started.
For further information about doji star patterns, you might be interested in these articles about the morning doji star and evening doji star pattern.
Long-Legged Doji
A long-legged doji is very similar to standard doji in that the upper and lower shadows are of equal height. However, the difference is that both of these shadows are much longer than a normal doji.
Again, this is a relatively neutral candlestick, however the longer wick indicates even stronger indecision between buyers and sellers than a normal doji.
Gravestone Doji
Another type of double doji pattern is the gravestone doji candlestick pattern.
The appearance of a gravestone doji is like an inverted letter “T”, with the open, low, and closing prices all pretty much similar. This means that the body appears at the lower end of the candle with a long upper shadow above it.
A gravestone doji suggests that bulls were initially driving the price higher before bears took control again. This strong rejection of bullish price action means that a gravestone doji is usually seen as a bearish reversal signal.
Therefore, if you see a double gravestone doji following an uptrend you should think about taking profits or entering a short position.
Dragonfly Doji
The last type of double doji pattern is the dragonfly doji.
In contrast to the gravestone doji, which looks like an inverted “T”, the dragonfly doji looks like an upright “T”, with the high, opening, and closing prices all the same. As such, the body appears towards the upper end of the candle with a long lower shadow beneath it.
A dragonfly doji suggests that sellers were initially in control of the price before bulls stepped in to drive it higher again. The fact that bulls ended the session in the driving seat means that the dragonfly doji is usually seen as a bullish reversal signal.
Therefore, if you see a double dragonfly doji after a downtrend, you should look to cover short positions or enter a long position.
How to Trade a Double Doji Candlestick Pattern
As with any trading strategy that relies on technical analysis, the more indicators you use to confirm a signal the better.
Let me illustrate this with an example…
The chart of Tesla below comes from TrendSpider, which has a neat candlestick recognition feature. As you can see, it automatically displays candle patterns of your choice, which I have chosen to be doji candles in this case.
In particular, note the double doji pattern highlighted at the top of the uptrend. The first thing to notice is how both bodies appear towards the bottom of their respective candle, with long upper shadows above them. This makes them most akin to the gravestone doji, which as mentioned above, gives the strongest bearish reversal signal of all the doji variations.
This is a good starting point for taking a bearish stance, however I like to see further evidence from other indicators.
Entry
Ideally, a double doji will coincide with either a support or resistance level, as this will increase our conviction about possible trend direction. A resistance level increases the chances of a bearish reversal, while a support level increases the chances of a bullish reversal.
Unfortunately, because prices were at all time highs in the chart above, there were no resistance levels to reference. However, on closer inspection, there were a few technical indicators that could have helped us instead.
Firstly, you will notice that volume was declining below its 20-day average at the same time as the double doji. This is otherwise known as weak relative volume and a bearish signal.
Secondly, you had a MACD sell signal soon after the double doji appeared, which provided further confirmation of bearish momentum.
Exit
Once you enter a position, you should apply a similar line of thinking to your exit strategy.
In the chart of Tesla above, I have highlighted 3 potential buy points that coincide with Fibonacci support levels. Note, the middle point also coincides with a bullish MACD crossover, so this would have been an ideal place to exit our short position.
FAQs
Is a Double Doji Bullish or Bearish?
Typically, an appearance of a double doji pattern signifies indecision and a potential trend reversal in either direction. Unfortunately, deciding which direction requires further analysis.
If the double doji appears in an upward trend alongside other bearish indicators, then this could signal potential bearish reversal.
Conversely, if a double doji appears in a downward trend alongside other bullish indicators, there is more likely to be a bullish reversal coming.