Bulkowski’s Gapping Down Doji

Written and copyright © 2008-2010 by Thomas N. Bulkowski. All rights reserved.

In my book, Encyclopedia of Candlestick Charts, pictured on the right, I explore the entire range of candlestick patterns from abandoned babies to windows (not exactly A to Z, but you get the idea), in both bull and bear markets, using almost 5 million candle lines in the tests.

The book takes an in-depth look at 103 candlestick patterns and reports on behavior and rank (3 types: reversal rate, frequency, and overall performance), identification guidelines, performance statistics (tables of general statistics, height, and volume), trading tactics (tables of statistics on reversal rates and performance indicators), and wraps each chapter with a sample trade. I share a sliver of that information below. If you like what you read here, then you will love the book. Help support this website and buy a copy by clicking on the above link.

Why they decided to give a special name to another doji candlestick is a mystery to me. The gapping down doji candlestick is a doji with a gap. Yawn. It is supposed to be a bearish continuation candle in theory but acts as a bullish reversal 56% of the time. That is almost random. The overall performance is awful, too, ranking 88th out of 103 candles, where a rank of 1 represents the best performing candle.

Important Results

Theoretical performance: Bearish continuation Tested performance: Bullish reversal 56% of the time Frequency rank: 57 Overall performance rank: 88 Best percentage meeting price target: 95% (bull market, up breakout) Best average move in 10 days: 2.52% (bull market, up breakout) Best 10-day performance rank: 65 (bear market, up breakout) All ranks are out of 103 candlestick patterns with the top performer ranking 1. "Best" means the highest rated of the four combinations of bull/bear market, up/down breakouts.

Gapping Down Doji

Discussion

The gapping down doji candlestick acts as a bullish reversal of the prevailing downtrend despite what theory says, at least according to my numbers. After price reverses, it does not trend far, either, scoring a rank of 88 and rising just 2.52% in 10 days. I consider a move of at least 6% to be exciting. The best performance rank over 10 days is just 65, where 1 is best, so it flunks there, too.

Perhaps I am having a bad day, but I do not see anything about this candle to excite me. In fact, none of the doji candlesticks are what traders expect. To me, they mean nothing at all. Performance is about random or near random (around 50% to 59%). I do not believe that you can look at a doji and say, with certainty, that price will breakout upward or downward tomorrow. I have tried that with many candlestick patterns without success (which is why I wrote Encyclopedia of Candlestick Charts...to define the probabilities of reversal and extent of the move).

Identification Guidelines

Three Trading Tidbits

If you want a few bones from my Encyclopedia of candlestick charts book, here are three to chew on. The pages refer to the book where the tips appear.

1. Gapping down doji candles that appear within a third of the yearly low perform best except after an upward breakout in a bear market -- page 214.
2. Determine the gap type to help anticipate the breakout direction -- page 216.
3. The candle breaks out upward most often -- page 217.

Example

The daily chart shows a gapping down doji candlestick (A) in a down trend. I classify a breakout as when price closes either above the top or below the bottom of the candlestick pattern, including the shadows. In this case, the breakout is upward. The uptrend does not last for long (4 days) before the downward move continues.

Notice how the gap above A almost matches the price level of the gap to its left (B). You can consider the AB move as creating an island reversal. Coupled with the left shoulder (LS), head, and right shoulder (RS), the chart pattern is a head-and-shoulders top, albeit somewhat unsymmetrical. All of those patterns suggest price will continue down.

-- Thomas Bulkowski