The Morning Doji Star is a widely recognized bullish reversal pattern in technical analysis. It consists of three candles: a large bearish candle, a Doji that indicates market indecision, and a large bullish candle confirming the reversal. While it is a powerful signal, traders often make mistakes when using it, leading to false trades and unnecessary losses. In this article, we will explore the most common mistakes traders make while trading the Morning Doji Star pattern and how to avoid them.
1. Misidentifying the Pattern
Example: Mistaking a Regular Doji for a Morning Doji Star
Many traders mistake a simple Doji within a downtrend for a Morning Doji Star. However, the key to the pattern is the presence of three distinct candles and a gap between the first and second candles.
Solution: Ensure that the pattern consists of:
- A strong bearish candle
- A Doji with a noticeable gap below the first candle
- A bullish candle closing above at least 50% of the first candle
2. Ignoring the Market Context
Example: Trading the Pattern in a Strong Downtrend
If the broader market is in a strong downtrend, a single Morning Doji Star may not be enough to reverse the trend. Instead, the price might continue downward after a brief retracement.
Solution: Always consider higher timeframes and the overall trend before trading the pattern. If the downtrend is strong, wait for additional confirmation.
3. Not Waiting for Confirmation
Example: Entering Immediately After the Doji
Many traders enter a trade immediately after spotting the Doji, anticipating the reversal. However, the Doji only indicates indecision, not a confirmed reversal.
Solution: Wait for the third candle to close above at least 50% of the first bearish candle. This confirms the reversal before entering a trade.
4. Overlooking Volume Confirmation
Example: Trading the Pattern with Low Volume
A Morning Doji Star formed on low volume may not have strong buying pressure behind it, making the reversal less reliable.
Solution: Ensure that the bullish confirmation candle is accompanied by an increase in volume, signifying strong buying interest.
5. Ignoring Support Levels
Example: The Pattern Forms in No-Man’s Land
If the Morning Doji Star forms in the middle of a downtrend with no support nearby, it may not lead to a strong reversal.
Solution: Look for the pattern near a strong support zone, such as a previous swing low, Fibonacci retracement level, or a moving average.
6. Setting Poor Stop-Loss and Take-Profit Levels
Example: Tight Stop-Loss Leads to Premature Exit
Some traders place a stop-loss too close to the Doji’s low, resulting in an early stop-out before the trade moves in their favor.
Solution: Place stop-loss below the Doji’s low and take-profit at key resistance levels to maximize risk-reward ratio.
7. Trading the Pattern in Low-Liquidity Markets
Example: Using the Pattern in Illiquid Stocks
Low-liquidity stocks or forex pairs may show erratic price movements, making the pattern unreliable.
Solution: Trade the pattern in high-volume assets where price action is smoother and more reliable.
8. Not Considering External Factors
Example: Ignoring Economic News and Events
A Morning Doji Star may fail if major economic news, such as an interest rate decision or earnings report, contradicts the pattern’s signal.
Solution: Check the economic calendar and avoid trading patterns just before high-impact events.
Conclusion
The Morning Doji Star is a powerful reversal pattern, but it must be traded with caution. By avoiding these common mistakes—such as misidentifying the pattern, ignoring market context, and failing to confirm with volume—traders can improve their success rate and make more informed decisions. Always combine technical analysis with risk management and external factors for the best results.