Low close Doji

LOW CLOSE DOJI   

The next trading signal is the opposite of the high close doji. It is a setup developed on the premise that once the market has rallied and established a high, when a doji forms, it is indicating there is indecision; and once we establish a lower closing low below the doji’s low, as shown in Figure 8.16, which establishes that there is a loss in bullish momentum, we can initiate a short position.

Characteristics

When the market is in an extended trend to the upside and the market is overbought, a doji appears, indicating indecision and weakness of buyers to maintain the upward trend. Pay particular attention if the candle preceding the doji is a tall white candle, which would be a two-candle pattern called a bearish harami doji cross. Watch for increased volume, as this also confirms a blow-off-top formation.

Trading Rules

When a doji appears, you should:

• Sell on the close or the next time period’s open once a new closing low is made from the previous time period’s doji’s low, especially when the market is against a key pivot point resistance target number.
• Place stops above the highest high point of the initial doji candle. Stops should be initially placed as a stop-close-only, meaning you do not exit the trade unless the market closes back above the doji’s high.
• Buy or exit on the open of the first candle after the previous candle makes a higher closing high than the previous candle.

You can use a filter confirming the signal, such as a bearish divergence stochastic or MACD pattern.

Here is a secondary guideline for the exit and risk management strategy. Get out of half of your positions on the first shift in momentum, which in a low close doji (LCD) trade would be after the initial trigger. The market moves in your favor; and at times we see a consolidation period, similar to a bear flag formation. Covering your shorts and booking profits on half of your positions will keep you in a profitable position for the remainder of the trade. You initially placed a stop-close-only; but for an intraday time period, this would have been a mental stop-close-only because most order platforms do not have that feature for day trading. As the market has moved in your favor, you can place a hard stop above the doji high. There will be times when you have to make a judgment on whether the risk is too excessive by the distance of the proposed entry and the stop-close-only. Therefore, you may want to scale out of two-thirds of a position at the first sign you see the trend lose momentum.