A Doji candle has a small body with a long upper wick and long lower wick. Long means longer than the length of the body of the candle. Below is an example of what a typical Doji candle looks like.
A recent client of Trading Coach Jo, recognized a Doji, but did not understand how to interpret this potential signal. Following is my simplified explanation:
After identifying a Doji, the most significant thing is to note where this Doji occurs on the chart. If a Doji appears at support or resistance, it could mean a reversal. I suggest that you wait for the next candle to confirm a change in direction.
If a Doji appears other than at support or resistance, it simply signifies indecision. You will notice that a stock that is stagnant in a horizontal channel, may have several Dojis with a short time period – all showing that the stock does not know which way it intends to move.
Be sure to watch for Doji candles at support and resistance. Noticing this pattern can give you advance notice of a pending move in the opposite direction.
Options trading coach Jo created a video to show examples of support on charts. Support is an area and not normally a specific number. Traders normally round the support area to “quarters” – $.25, $.50, $.75, $1.00 For example, if support was at $68.17, a trader would either round down to $68 or round up to the next quarter which would be $68.25.
Always look for the support area when evaluating a stock. If the stock is moving downward and approaching the support area, make sure that the stock closes below the support area and then get confirmation of going even lower the following day or two before buying puts. If the stock is moving downward and approaching the support area, make sure that the stock bounces up from support and gets confirmation of going higher the next day or two before buying calls.
Train your eyes to see significant support. Draw support on your charts. Notice that the more times that a stock respects support, the more significant the support.
Most clients of Options Trading Coach Jo struggle with support. Support is an area rather than an exact magical number.
A strong support area is an area that the stock has frequently gone down to and either pops back up or hangs out at that area until it eventually pops back up. The more times that the support area is hit, then goes back up, the stronger the support area.
Traders that look at a chart can easily see the support area. In fact, they may make the decision or tell their broker to buy the stock once it hits the support area and starts back up. Many traders seeing this same pattern will make the same decisions to buy at support. Due to this high volume of buying, the stock price will raise and continue to raise as more traders see the stock bounce up from support.
Support can be a horizontal area, an ascending area or a descending area. Pay attention to these support areas. Start by drawing lines on your chart where you see a support area.
Determine support areas for 3 stocks by drawing lines on their charts. Watch to see if the stock respects the support area and bounces off and back up.
Of course, the support area can be broken. In this case, watch for the next lower support area and watch to see if your stock respects the new support area.
Determining support can be seen as an art rather than a science. Train your eyes to see support areas and your trading profits will greatly be improved.
One of the first candle patterns that I teach my stock option trading clients is the Hammer. This candle pattern can be used for downtrends as a reversal of direction to an uptrend. Please check out my short video below where I give examples of what a hammer is and when it is giving a significant signal because it combines with Western technicals.