The Japanese word "doji" means "mistake" or "a foolish thing." This probably is due to the appearance of a doji session. Instead of a rectangle representing the difference between opening and closing price, the doji is a horizontal line, meaning open and close were the same price or very close.
The doji is not so much of a mistake, however, as a session in which buyers and sellers may be struggling with one another for control, and neither side is able to move the price off its mark.
But interpreting the doji is not that easy. Not only does the specific shape matter; it also is important where in the current trend a doji appears, or series of doji sessions appear.
The first type of doji is a line without any upper or lower shadows. This is unusual, indicating that a stock price opened and closed at the same level without any movement in either direction during the session.
The next looks like a cross or letter 't' which can mean several things. When more than one of these appears close to one another, it could mark a double top or double bottom, for example. A doji with very long upper and lower shadows is called a long-legged doji. This indicates indecision about which direction the price will move next. But the outcome is close to 50-50, so by itself it has little value. But it really depends on where you find this one. The long-legged doji can serve as confirmation of reversal, for example. So finding a reversal signal that is bullish, followed by a long-legged doji at the bottom of a downtrend, could confirm a likely upside reversal. The same applies to one found at the top of an uptrend, confirming a bearish reversal signal.
The doji with the horizontal line at the bottom, and an upper shadow only, is called a gravestone doji. This usually is identified as bearish, but in reality it is another 50/50 signal. Thus, it is useless by itself, but like the long-legged variety, it could serve as confirmation of reversal if found after a signal at the bottom of a downtrend or at the top of an uptrend.
A doji with the horizontal line at the top and a lower shadow only is called a dragonfly doji. It is normally identified as bullish, but like the long-legged and gravestone doji sessions, this is yet another 50/50 indicator -- useless by itself, but as part of a reversal and confirmation signal, it could be important if it shows up at the top of the uptrend or the bottom of the downtrend.
The doji comes in many more varieties and applications, but these are the usual types you will find on charts. When the doji appears as part of another pattern, they take on yet more meaning. These include signals like northern or southern doji, harami cross, abandoned baby, and the tri-star, to name a few.
A concluding point about the doji: Although by themselves they are not strong reversal indicators, doji sessions are very common and may form up as part of more expanded signals, or confirm reversal in other forms. The "foolish thing" that is at the root of the name is not applicable in every case. In fact, a doji session, upon examination, provides insight into price behavior that other signals may lack.
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