When Munehia Homma first created candlestick charts in they 1700s, he had no idea it’d change the way we look at stocks 300 years later.
To him, candlestick charting was only meant for the rice trade.
He’d record the opening day’s price of rice, the low and the close. And over time, he’d begin to see price patterns in his recordings, mapping out repetitive signals in the price bars.
He’d soon give them names, like spinning tops, dojis, and hanging man – candlestick names we still use to this day. The discovery of such patterns helped him successfully predict future direction of rice prices, giving him a significant advantage over other traders.
More than 300 years later, we’re using those same candlesticks to spot opportunities in stocks.
In fact, one of our personal favorites of the bunch are doji crosses.
The Doji Cross
Doji crosses – which take the shape of a cross — are a sign of indecision of bulls and bears. When found at the top or bottom of trend, it can indicate that a reversal in the other direction may be nearing. However, as with any technical indicator, confirmation is key. Typically, when we see a doji at top or bottom of trend, it can be a sign of indecision among the bulls and bears.
They tell us there’s a potential reversal in the stock.
For example, here are a few hiding in the iShares Russell 2000 Growth ETF (IWO). You can see that when they appear at top or bottom of trend, the ETF has tendency to pivot and move in the other direction.
Granted, a cross doesn’t tell you with absolute certainty a reversal will happen, but it’s well worth keeping an eye on.
In addition, it’s also not safe to rely solely on a cross.
Make sure you confirm your findings with other technical indicators, such as Bollinger Bands (2,20), MACD, relative strength (RSI) and even Williams’ %R (W%R).