Imagine a chart where you can see a clear uptrend and then a bearish engulfing pattern and then a formation of a doji.
What is the use of a doji here? When there is an uptrend and has been there for longer then this indicates that the bulls are in control. When a green candle is formed on the first day then this signifies that the bull is still dominating the market. When the market opens higher on the second day then there is now a desire to sell in the market and this causes the price to go below the previous day’slow. The trading that takes place on day 2 sets in some panic but not enough to get the bulls out of the market.
Imagine now what happens on the day 3. The opening is still very weak but not as much as the close on day 2. This does not go well with the bulls. The market tries to move up higher on day 3 but this cannot be sustained. The market is not able to sustain the low also and this causes a doji to form. When a doji is formed this means that there is indecision in the market and neither the bulls nor the bears have any control.
The bulls were panicked on day 2 and on day 3 they are not sure what is going on. There are panic and uncertainty and this causes the doji to be formed.
What can you infer out of it?
When you see adoji that get formed after a candlestick pattern that is recognizable then this creates even better opportunity. It is a good formation to take a trade because here the bulls have definitely lost control. You can now go ahead and short the market, but take care to place a stop loss on the trade.
The piercing pattern
Ina piercing pattern, this review the candle that gets formed on day 2 partially engulfs the candle that is formed on day 1. The candle formed on day 2 is a green candle and that on day 1 is a red candle. The engulfing should be more than 50% and less than 100%.
As long as this stands true the pattern can be traded as you will trade an engulfing pattern. The risk-taking trader will take the trade on day 2 when the pattern forms and the market is about to close. The risk-averse trader will take the trade after the second day only when he is sure that the pattern is confirmed. The stop-loss has to be placed below the candlestick pattern formation.