The bearish doji star

The bearish doji star is another bearish reversal pattern that contains — you guessed it — a doji. This pattern is also an extension of the bearish inverted hammer, which I discuss in the previous section.

Spotting the bearish doji star

The bearish doji star always occurs in an uptrend, and the setup day is an up day. The signal day is a doji that's sort of hanging out there by itself, because the opening of the signal day is gap down from the previous day's price action. Figure 8-13 is an example of how the two days that make up a bearish doji star appear together on a chart.

Figure 8-13:

The bearish doji star pattern.

Understanding how to trade using the bearish doji star

Figure 8-14 is a chart that shows the bearish doji star in action. In this example, this doji star pattern is working well to signal an impending drop in the stock for microchip maker Intel (symbol INTC). An uptrend is in place, and the setup day of the pattern is a bullish day in accordance with the trend. The signal day is a doji, with the combined open and close outside of the range covered by the setup day's trading activity. After all the bullishness of the previous few days, the bears are finally making a stand.

The day after the pattern is a very bearish day, so if a trader didn't put on the trade during the doji day, he doesn't have a chance. Then the day after the long black candle appears, the stock gaps down tremendously. This change is a quick victory for any sellers that are attracted to short this bearish doji star.

Failing to give a good short signal

For the losing example of a bearish doji star, I present Figure 8-15, which is a chart of the stock for Apple Computer (symbol AAPL). The bearish doji star I highlight in the figure showed up during a bullish trend, and you can see that this chart includes a nice up day followed by a doji. All the bearish doji star criteria are in place, but the pattern fails swiftly and mercilessly, and the trend continues with a very strong up day directly after the pattern. The potential Apple trade goes rotten.

My failure level for a bearish doji star is the high of the signal day, as opposed to that day's open or close. Using the combined open and close area of the doji doesn't provide much room for volatility on a stop. If the stock opens just slightly up the next day, then it will hit the buy stop, which is very likely to happen even in the case of a trend reversal. In order to avoid regular market noise forcing me out of a trade, I prefer to rely on the high of the signal day for my stop exit.

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