What is a star candlestick?
It is a small candle body which gaps away from the previous one. It could be at the top of an uptrend or at the bottom of a downtrend market. A star could indicates that a trend is going to end and the color is not an important matter.
One of the famous stars is called a doji. It indicates that the opening and closing price are the same. The upper or lower shadow could be varied and it looks like a cross. It is also requires a confirmation for the following day (depends on what time period to be used: hourly, daily, etc).
A doji star describes a situation where the bulls and the bears are being ‘at war’. They both have a same strengthens at the market. This could be a “deadlock situation” between buyers and sellers. The price is moving at a wide range, but the closing price is just as the same as the opening.
Now, let me tell you how a doji star could be a reversal sign.
When you see a doji star at a top of a bullish trend, after a long white candlestick and it gaps above the previous candle, it indicates a reversal sign and therefore the price at the following day should be lower. This could be happened either because of an increasing number of sellers or a decreasing number of buyers.
If a doji star occurred at a bottom of a bearish trend, after a long black candlestick and it gaps below the previous candle, it is also indicates a reversal sign and the price might be higher next. At a downtrend, the bears are in charge but there is not enough energy to continue this situation.
How do we should act?
We just need a confirmation after a doji star appeared. So, when price is falling after a doji star at a top of an uptrend, just take profit (if you are a stock trader) and sell (if you are a forex trader), because it seems that the price is going to be lower and lower.
In reverse, if there is a doji star at the bottom of a downtrend and the following price is up, you should take a buy action, because it shows a reversal sign that the price is going to be higher and higher.
It is simple, isn’t it?
Remember that a doji pattern needs a confirmation to make us sure what action should be taken next.