Using regular dojis to short

Regular dojis work well in short or selling situations, too. Figure 6-12 shows a short doji formation in an uptrend that quickly reversed for a nice short selling opportunity in the U.S. Treasury bond futures. The short doji is highlighted, along with another doji. The day after the short doji, the rarest of all dojis appears on the chart: the four-price doji, which occurs when the open, high, low, and close are the same on a chart. This occurrence is very rare and usually happens on a very low volume day. The incidence may also represent a data error. In this case, having a source to double-check the data behind the chart would be very helpful. (See the "Data Integrity" sidebar in this chapter for more details.)

Figure 6-11:

A regular long doji appearing (and failing) on a chart of the Yen futures.

Figure 6-11:

A regular long doji appearing (and failing) on a chart of the Yen futures.

Figure 6-12:

A short doji on U.S. Treasury bond futures.

Figure 6-12:

A short doji on U.S. Treasury bond futures.

The signal doji in Figure 6-12 meets the criteria of appearing in an uptrend and then also appears to have the open and close in the bottom half of the day's price action. No violation negates the signal, and the signal is quickly followed by a downtrend lasting several days. I wish all my trades were so easy to identify and profit from.

Like all other signals, short dojis aren't perfect. Have a look at Figure 6-13, a chart of IBM. This figure shows two failures of a short doji signal within the span of just a couple of weeks. Both are highlighted on the chart, and both fail pretty quickly.

This leads me to another fact I've picked up over the years. Each market or stock may have its own individual trading characteristics. Although shorting a doji formation in an uptrend may be a highly successful trading method for the majority of financial instruments, there may be some out there who continuously shrug off this sell signal. Unfortunately, knowing what works well in various markets is just a matter of putting in time and gaining experience.

Figure 6-13:

Short dojis failing on IBM.

Figure 6-13:

Short dojis failing on IBM.

Data integrity

With so many financial products trading in the world today and so much data floating around, data errors are bound to occur. In the case of a four-price doji, having a second source to check the price action of the day is extremely valuable. As a professional trader, I use multiple charting software packages and data sources to assure that the data I'm using accurately reflects the price action that occurred in the past. With fewer resources, you may want to consult an exchange's Web site for data accuracy or free data sources such as Yahoo! (www.yahoo. com) or MarketWatch.com (www.market watch.com). (Flip back to Chapter 4 for more information about online and electronic sources of charting information.)

MarketWatch.com has a terrific function that allows you to enter a stock symbol and a specific date to check for accuracy. Either way, when you see some price action that looks out of place on a chart, doing a double check can save you frustration and money in the long run.

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