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The Doji Star is a powerful candlestick pattern used by technical analysts to gauge potential market reversals. This pattern is characterized by a Doji —a candlestick in which the open and close prices are virtually equal, signalling indecision in the market. When this Doji appears after a significant trend and is accompanied by a gap, it forms the Doji Star pattern, which can be indicative of a potential shift in the market direction.
In a Doji, the open and close prices are very close, often identical, which creates a thin or non-existent body. The shadows (or wicks) of the Doji can vary in length, showing the range of price movements during the period.
1. Bullish Doji Star:
Context: Appears at the bottom of a downtrend.
First Candlestick: A large bearish candlestick.
Second Candlestick (Doji): Opens below the first candlestick’s close, indicating that sellers are losing momentum.
Interpretation: This pattern suggests that the selling pressure in the downtrend is weakening. The appearance of the Doji indicates indecision among traders, and if the next candlestick is bullish, it confirms a reversal, signalling a potential buying opportunity.
2. Bearish Doji Star:
Context: Appears at the top of an uptrend.
First Candlestick: A large bullish candlestick.
Second Candlestick (Doji): Opens above the first candlestick’s close, indicating that buyers are losing momentum.
Interpretation: This pattern suggests that the buying pressure in the uptrend is weakening. The Doji shows indecision, and if the next candlestick is bearish, it confirms a reversal, signalling a potential selling opportunity.