Neutral Doji Candlestick Pattern

Neutral Doji Candlestick Pattern: Backtest Findings

Sometimes, the bull and bears fight each other to a standstill, giving rise to a Neutral Doji candlestick pattern. As with many other candlestick patterns, this pattern tells a story about the market and how the price might move in the future. Let’s take a look at the Neutral Doji candlestick pattern.

The neutral doji candlestick pattern is a single-candle pattern that is characterized by little or no real body and equal-sized upper and lower shadows. The pattern is pretty common and can form anywhere on the price charts. Depending on where it forms and as a part of other patterns, such as morning doji star, harami star, and evening doji star patterns, it can have a bullish or bearish reversal significance, as the case may be.

In this post, we take a look at the Neutral Doji candlestick pattern.

Understanding the neutral doji candlestick pattern

The neutral doji is a one-candle pattern that shows little or no difference between the opening and closing prices, resulting in a small or non-existent body with equal upper and lower shadows. This pattern is commonly found on price charts and can indicate either a bullish or bearish reversal, depending on its location on the chart and whether it is a part of other patterns like the morning doji star, harami star, and evening doji star.

The pattern can have different interpretations depending on its location and relationship to other patterns. When the neutral doji forms at the bottom of a downward swing, it can indicate a bullish reversal, suggesting that the bears are losing control and the bulls may take over. This is especially true if it forms a part of popular bullish reversal patterns, like the morning doji star and bullish harami star patterns.

Conversely, if it forms at the top of an upward swing, it can indicate a bearish reversal, suggesting that the bulls are losing control and the bears may take over. This is especially true if it forms a part of popular bearish reversal patterns, like the evening doji star and bearish harami star patterns.

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How to identify a neutral doji pattern

Identifying a neutral doji pattern is relatively simple, as it has a unique appearance on the price chart. To identify this pattern, you need to look for the following characteristics:

  1. Very little or no real body: The real body of the candle should be very little or non-existent, as the opening and closing prices are almost at the same level.
  2. Equal upper and lower shadows: The upper and lower shadows should be approximately equal in length, and they are not too long.
  3. Any color: The pattern can have any color, bullish (white or green) or bearish (black or red), depending on whether the closing price is marginally below or above the opening price.
Neutral Doji candlestick pattern
Neutral doji pattern backtest

The neutral doji can form anywhere on the price chart, either after an upswing or a downswing. To accurately identify a neutral doji pattern, you need to look at the context in which it forms — whether it forms in a downswing or an upswing and as a part of another pattern.

The significance of the neutral doji in technical analysis

Generally, the doji candlestick pattern signifies indecision among buyers and sellers during the trading session the candle represents. This can be seen from the way the price moved during that session: it moved up and down by about the same length and ended up closing around the same level where it opened, giving it a ‘+’ shape. As a result, the candle has no real body.

With the way the price moved, it shows that neither the bulls nor the bears dominated the session, which is why it is considered an indecision pattern. However, when you consider where the pattern forms, it could actually signify a halt in momentum. If the pattern forms at the bottom of a downtrend, it could be interpreted as the bearish momentum getting exhausted, indicating the possibility of a price reversal. Similarly, if it forms at the top of an uptrend, it could be interpreted as an exhaustion in the bullish momentum, indicating the likelihood of a price reversal.

However, a neutral doji alone doesn’t provide enough evidence for a potential reversal. It has to occur as part of other reversal candlestick patterns, such as morning doji star, evening doji star, harami star, or TriStar, to have a significant reversal implication.

The difference between a bullish and bearish doji

In terms of shape and physical features, the neutral doji pattern is the same anywhere it forms. Its bullishness or bearishness depends on where it forms. So, the difference between a bullish doji and a bearish doji is the price swing where the doji pattern forms.

A bullish doji forms at the bottom of a downward price swing, indicating that the bears are losing control, potentially paving the way for a bullish reversal. A bearish doji, on the other hand, forms at the top of an upward price swing, indicating that the bulls are losing control, potentially paving the way for a bearish reversal.

Both the bullish and bearish doji patterns are used as potential signals for a market reversal if they occur in the right context. That is, together with the surrounding candlestick, they must form a multi-candlestick reversal pattern, such as the harami star, tristar, evening star, and morning star.

How to interpret a neutral doji in market trends

To interpret a neutral doji in market trends, you need to consider a lot of things. The first one is the context in which the pattern forms — is it in an upswing or a downswing? In an upswing, the pattern is likely to have a bearish implication, while in a downswing, it is likely to have a bullish implication.

Apart from the swing where it forms, you should check the surrounding candlesticks to know if, as a group, they form a more potent reversal pattern. In a downswing, the doji pattern can be a part of a bullish harami star, a bullish tristar, or a morning doji star pattern, any of which has a more potent bullish reversal effect than the doji pattern alone.

Similarly, in an upswing, it can be a part of a bearish harami star, a bearish tristar, or an evening doji star pattern, any of which has a more potent bearish reversal effect than the doji pattern alone.

The role of the neutral doji in determining market sentiment

The neutral doji candlestick pattern can be a useful tool in determining market sentiment, as it can signal a potential change in price momentum in any direction. Given the shape and nature of the pattern — the price opening and closing around the same level and making a similar displacement to the upside and downside — it signals the end of whatever momentum the price had before the pattern formed.

When the neutral doji forms in a downswing, it indicates that the bears are getting tired of pushing the price lower. So, the market sentiment may be about to shift from bearishness to bullishness. Similarly, if it occurs at the top of an uptrend, it indicates that the bulls are getting tired of pushing the price higher, and as such, the market sentiment may be about to shift from bullishness to bearishness.

Using neutral doji patterns in combination with other technical indicators

You can use a neutral doji pattern in combination with other technical analysis tools and indicators. In fact, it is recommended you use other tools to confirm the pattern, even if it is occurring as a part of a more potent reversal pattern, such as the morning or evening star.

Some of the technical tools and indicators you can use with the doji pattern include trendline, support and resistance level indicators, moving averages, Bollinger Bands, and momentum oscillators. In an uptrend, use an up-trendline or a long-period moving average to indicate the trend and show dynamic support levels where you can look for bullish doji patterns, such as the bullish tristar, bullish harami star, and morning doji star.

In a downtrend, use a down-trendline or a long-period moving average to indicate the trend and show dynamic resistance levels where you can look for bearish doji patterns, such as the bearish tristar, bearish harami star, and evening doji star.

You can use momentum oscillators like stochastic or RSI to confirm the doji reversal signal. An RSI rising from an oversold region following the formation of a bullish doji pattern around a support level confirms the bullish reversal signal. The corresponding scenario is true for the bearish doji pattern at a resistance level and the RSI falling from the overbought region.

Common misconceptions about the neutral doji pattern

There can be many misconceptions, depending on the trader. The common one is misinterpreting the pattern as a reversal pattern on its own. The neutral doji pattern in itself only shows indecision in the market and is never a sign of a potential reversal. However, in the right market context, together with other candlesticks around it, it can indicate a potential price reversal.

Another misconception is that the pattern cannot be a part of a continuation pattern. In a rapidly moving market, the doji pattern may simply indicate a pause in the market that signifies profit-taking.

Real-life examples of the neutral doji pattern in stock market analysis

The chart below is that of Apple stock. It shows a doji candle pattern at the bottom of a downward price swing. The price had been consolidating at that level for a while before the doji pattern formed, further confirming the tiredness of the bears. If you look closely, the pattern is part of a morning doji star and doji star pattern. Note the level of the stop loss and profit targets.

Neutral Doji trading rules

What is a neutral candlestick pattern?

A neutral candlestick pattern is a candle that signifies indecision during the trading session it represents. It can be a neutral doji pattern or a spinning top pattern. A spinning top pattern is a relatively small candlestick with a small real body and equal-sized upper and lower shadows. As with the neutral doji pattern, the spinning top pattern signifies indecision in the market.

The difference between a neutral doji pattern and the spinning top is that the doji has no real body while the spinning top pattern has a small real body.

Is a doji bullish or bearish?

The neutral doji pattern can be bullish or bearish, depending on the market context in which it occurs. A doji candlestick that forms at the bottom of a downward price swing is likely to be bullish, especially if it forms around a key support level and other candlesticks around it support a bullish price reversal. Likewise, a doji pattern that forms at the top of an upward price swing is likely to be bearish, especially if it forms around a key resistance level and other candlesticks around it support a bearish price reversal.

Is a doji candle bullish?

Doji candle is not bullish in itself. The bullishness of a doji candle depends on the market situation where it forms. If the doji candle forms at the bottom of a downward price swing, it is likely to be bullish, especially if it forms around a key support level and other candlesticks around it support a bullish price reversal. For example, if it is part of a morning doji star, bullish harami star, or bullish doji tristar pattern, it can have a bullish reversal effect and thus be considered a bullish pattern.

But if the doji pattern occurs at the top of an upswing, it may not be bullish, unless it is part of a continuation pattern.

What does a neutral bearish candle mean?

A neutral bearish candle refers to an indecision candle that forms at the top of an upswing, indicating exhaustion in the ongoing bullish momentum. This could be a neutral doji pattern or a spinning top pattern.

The pattern is not bearish in itself but where it forms signifies weakness of the ongoing bullish momentum, indicating the likelihood of a bearish reversal. The pattern becomes more bearish if it occurs as a part of an evening star pattern or a harami pattern.

FAQ:

How to identify a Neutral Doji pattern on a price chart?

The Neutral Doji is a single-candle pattern characterized by a small or non-existent body, with equal-sized upper and lower shadows. It can indicate bullish or bearish reversals based on its location on the chart. Look for a candle with very little or no real body, equal upper and lower shadows, and any color (bullish or bearish), depending on the closing price’s relation to the opening price.

How is the Neutral Doji pattern interpreted in technical analysis?

The pattern signifies indecision among buyers and sellers. Depending on where it forms, it could signal exhaustion in bearish or bullish momentum, potentially leading to a reversal. The pattern signals indecision in the market, but its interpretation depends on its location. At the bottom of a downtrend, it may suggest a bullish reversal, while at the top of an uptrend, it may suggest a bearish reversal.

How to interpret a Neutral Doji in market trends?

The Neutral Doji can help determine market sentiment by signaling a potential change in price momentum. It indicates exhaustion in either bearish or bullish sentiment, depending on its location. Interpretation involves considering the pattern’s location in an upswing or downswing. It gains more significance when part of multi-candlestick reversal patterns like harami star, tristar, evening star, or morning star.

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