Candlestick is the frequent term you encounter while trading stocks or forex. A candlestick chart shows an underlying asset’s open & close prices, the high & low for a timeframe (i.e. minute, hour, day, month). While performing technical analysis might require a strong understanding of multiple candlestick patterns, Doji patterns are common. The Long-legged Doji is also one of them. In this piece, let’s discuss the long-legged Doji candlestick pattern and how to trade it.
What Is Long-Legged Doji?
The long-legged doji is a candlestick with long upper and lower shadows and a small body. It is one of the four doji stick candles, including neutral, gravestone, dragonfly and long-legged. All these candles have one thing in common – their tiny body. When a candle opens and closes almost on the same level, it makes a small body known as Doji.
What Does Long-Legged Doji Indicate?
The pattern shows indecision and is most notable after a sharp rise or fall. In other terms, a long-legged Doji indicates uncertainty about the security’s price direction. If price forms a long-legged Doji before breaking out into a new trend, it may signify that the consolidation phase has begun.
Long-legged Doji holds critical significance when they occur amidst a strong up or downtrend. With supply and demand nearing equilibrium, a trend reversal is possible. Because the price has reached equilibrium or indecision, it does not move in the same direction, while the market sentiment may change.
The price is pushed higher and closed above the opening for most periods in an uptrend. Unlike previous periods when buyers were in charge, the long-legged Doji shows a battle between buyers and sellers that ended in a tie. Not to mention, the pattern appears in all time frames but is more significant in longer-term charts where more participants contribute.
Examples of Long-legged Doji
The chart below shows some long-legged dojis in a daily chart.
On the left, the price falls and forms a Doji. After then the price consolidates and rises but fails to gain traction and falls again. Since the price falls, the long-legged Doji appears, leading to the beginning of the consolidation period once again. The price rises above the consolidation. However, the long-legged Doji foreshadowed the market’s consolidation or indecision before the upward reversal.
On the right side, the price falls. Later, the long-legged Doji forms, dropping below the consolidation low before rallying to close within the consolidation and then rose. Notably, this time the body of the Doji appears slightly significant than the previous ones.
How to Identify Long-legged Doji?
You can follow the instructions below to locate the long-legged Doji candlestick on a price chart.
- Ensure that the Doji candlestick’s beginning and closing prices are the same.
- Doji candlesticks should have extended higher and lower shadows.
- The size of the lower and upper shadows should be roughly equal.
Long-legged Doji in Uptrend
When the bearish Long Legged Doji has long shadows on both ends in an uptrend, it suggests buyers and sellers are indecisive, leading to a bearish reversal. In such a scenario, the market is bullish and trending upwards. Then a Long Leg Doji appears, bucking the trend.
Long-legged Doji in Downtrend
Like uptrend, long-legged Doji has very long shadows on both sides in a downtrend as well. Since buyers and sellers are indecisive, it indicates a bullish reversal. This pattern depicts a bearish market in a downtrend. Then a Long Legged Doji appears and gaps the trend. Not to mention, the next day’s trend must reverse to confirm this pattern.
Trading the Long-legged Doji
How to trade long-legged Doji?
While there are different methods to trade the long-legged Doji, entering positions based on it isn’t necessary. Given that the price moves a little on a closing basis, some traders believe that one candle pattern isn’t significant enough to warrant a trade decision.
On the other hand, some traders prefer to wait until the price moves after the appearance of the long-legged Doji. Notably, long-legged Doji can form a significant consolidation or appear in clusters. The previous trend may be reversed or continued depending on how the price breaks the coalition.
Initiating a Long-legged Doji Trade
Before entering a position, you could wait until the price moves above the long-legged Doji’s high or low. If the price rises, then go long. On the other hand, if the price falls below the pattern, go short. Alternatively, you can wait for a consolidation to form around the long-legged doji before going long or short. The long-legged Doji pattern is more likely to be valid if it appears near a major resistance or support.
Let us share some other methods to trade Long-legged Doji below.
Moving Average: The appearance of the long-legged Doji piercing the moving average after you apply a 50 or 200-day moving average is a positive indicator that price could break or rebound through the moving average.
Bollinger bands piercing: You can also trade the long-legged Doji with Bollinger bands. In this case, the Dojis tend to break through the Bollinger bands (Upper or Lower), indicating a reversal if a candlestick closes in the other direction. Not to mention, you must consider the width of Bollinger bands before trading them.
Support & Resistance: This candlestick pattern often appears at important support and resistance levels, indicating price decline. Eventually, the price tested support and resistance but couldn’t close higher. Therefore, if the following candlestick pattern forms, you could expect a support or resistance level reversal.
Long-legged Doji – Other Considerations
Profit Targets
Long-legged Dojis have no profit targets attached, so traders must devise a way for doing so. For example, you could use technical indicators or exit based on the best exit points in your backtest. Using a fixed risk/reward ratio which worked well in testing, could also help keep things simple and efficient.
Risk Management
Risk management is essential when trading long-legged Doji or any other technical indicator. Besides carefully defining a risk-reward ratio, using a stop-loss is also vital. Since long-legged Doji can also lead to false information, a tight stop loss would help reduce risk. Place a stop loss below the long-legged doji or consolidation if going long. On the other hand, put your stop loss above the long-legged doji or consolidation if you’re going short.
Conclusion
A long-legged Doji candlestick represents indecision and signals market uncertainty. Its occurrence in price behaviour can indicate a variety of factors. Possibly, it could indicate a price reversal from the preceding trend. On the other hand, it could also mean that the market consolidates before breaking out in the prevailing trend’s direction. As a result, the long-legged Doji candlestick should never be evaluated in isolation but rather in conjunction with all other elements of your strategy.
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