The use of Japanese candlesticks in Forex trading is common among most traders. And, one of the candlesticks patterns that is widely used is the doji (“doji” refers to both singular and plural form). Candlestick doji is an indecision candle that has its open price equivalent to its close price, or nearly the same. As illustrated by the figure below, doji normally have very small bodies that appear in the form of thin lines, or they may not have real bodies all together. Therefore, when they are seen on charts, they signify that neither the buyers nor the sellers managed to gain control of the currency pair. As such, a breakout is imminent.
To trade doji breakout, you should start by using an indicator such as MACD or Bollinger Bands to confirm the breakout. With the MACD indicator, you can use the trigger line to validate the breakout. If the doji breakout is convincing, then it is likely that the histogram will turn over to the direction you are going to trade. Bollinger Bands indicate there is a breakout when the bands are widening away from one another.
Another important method you can use to confirm a doji breakout is by using trend lines. A trend line usually connects at least two tops or bottoms together on charts. If price manages to convincingly break out of the trend line and close on the other side, then it signifies that a reversal of the trend has taken place. Thus, when this takes place where there is a doji pattern, you can use it as a way of validating the breakout. Other methods you can use for spotting doji breakout include break of chart patterns, break of channels, and break of triangles.
After you’ve confirmed the doji breakout, then you can go ahead and place your trade. Confirming the breakout is important to prevent you from being duped by false moves in the market. False breakouts occur when you think price has changed direction but it lacks enough momentum to keep moving in the same direction of the break and thus reverts to the original direction.
If correctly implemented, doji breakout strategy can increase your success rate when trading currencies. And, when using this strategy, you should avoid low volatility currency pairs because they are more common to experience false breakouts. Further, you should ensure you’ve done enough analysis before placing trades based on this strategy.