Traders have been using candlestick charts for ages. For the first time in the 17th century, A Japanese merchant called Homma observed that while there is a relationship between price, supply and demand of a commodity, dealers’ emotions usually dominate the market. Candlestick patterns help traders to anticipate price movement based on historical trends. This piece will discuss one of the most effective candlestick patterns called Morning Star in detail.
What Is Morning Star?
A morning star is a three candlesticks pattern usually perceived as an early indication of a bullish trend. A morning star occurs downward, signaling the start of an uptrend. In simple terms, you may anticipate a price trend reversal when you see a morning star. Traders confirm the trend reversal after spotting a morning star using other indications.
Characteristics of Morning Star
For optimal accuracy, the reversal pattern of the morning star should emerge at a critical support level or near the bottom of a downtrend. To illustrate this point, consider how the financial market swings in a zigzag fashion.
Reversal of a swing level indicates the end of the current trend and the beginning of a new one. The formation of the morning star follows the same logic.
Buyers actively speculate on the price on Day 1 for this pattern. After a downward gap on Day 1, aggressive sellers become active. The sellers narrowly make a new low, indicating a loss of momentum at the end of the day. That is the crucial morning star pattern indicator. After two days of bearish market activity, a powerful bullish candle develops on day three.
The above graphic depicts the morning star formation on a pricing chart. The third day begins with a bullish outlook and ends above the second day’s close. The pattern’s shared features include:
When a morning star pattern appears on a downtrend’s bottom, it’s a bullish morning star.
Morning Star formation near a solid support level is more likely to function.
The pattern is more robust if the third day’s candle is more significant than the first day.
The second day should have a bearish gap, whereas the third day should have a bullish gap.
What Does A Morning Star Tell You?
Since a morning star is simply a visual pattern, no computations are required. The morning star has a low point on the second candle that becomes visible after the third candle closes. Technical indicators like the relative strength indicator (RSI) suggesting an oversold stock or price action reaching a support zone might help analysts forecast the formation of a morning star.
The chart above is in black & white, although red and green are more popular candlestick colors. However, the morning star’s central candle holds more significance since it can be black or white. Sometimes, it could also appear red or green as the session progresses and the buyers and sellers level out.
Morning Star Example
Traders may use the morning star pattern to visually signal a trend change from bearish to bullish but with other technical indicators backing it up as well. Not to mention, pattern creation is also affected by volume.
On the third day, traders want to see volume increase steadily. Regardless of other signs, candle printing’s significant volume on the third day confirms a pattern (and an uptrend). Traders will likely take on a bullish position when the morning star pattern develops on the third day and hold them until an anticipated reversal.
Doji Morning Star VS the Morning Star
The formation of morning star patterns may sometimes vary. A Doji appears when a candlestick exhibits a flat middle price movement. It’s a minor candlestick with no wicks, resembling a Plus symbol. Unlike the morning star having a thicker central candle, a Doji morning star suggests market indecision more reasonably.
Because more traders may see a morning star developing when a Doji follows a black candle, the volume spikes, and the white candle lengthens.
Morning and Evening Stars’ Dissimilarities
The morning stars and evening stars are opposite of one another. Starting with an enormous white candle and ending with a smaller black or white candle is typical. Then the black candle should be at least half the length of what came before it. It is time for bears to take over since the evening star signals an end to an upsurge in the stock market.
Limitations of Morning Star
Like other candlestick patterns, the Morning Star has a few limitations, listed below.
On a chart, the morning star comprises three candlesticks. You might miss a trade if the price reverses the trend before three days.
You can’t rest assured of mobility. Despite following all the guidelines, you may hit the stop loss.
Finding the setup on the charts takes time and patience, especially for D1 or W1 time-frames.
In turbulent markets, getting shut out at breakeven is more likely.
Conclusion
The formation of a valid morning star indicates a bullish reversal after a long bearish trend. Although the morning star pattern is highly profitable, traders should thoroughly analyze it and practice on a trial account. Also, traders should not forget to assess the market’s risk. A market collapse or a dramatic rising or negative trend may happen quickly. Remember that even the most flawless candlestick formation cannot forecast the future. Always corroborate chart patterns using trade volume, other technical indicators like the RSI (Relative Strength Index), and a few more.
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Candlestick charts combine data from multiple time scales into a single price bar, making it more helpful than standard lines connecting closing prices or open-high and close low bar. Candlesticks create patterns that forecast price direction. Not to mention, color-coding makes this tool look more sophisticated. Traders widely use Japanese candlestick charting techniques to evaluate financial markets. In this piece, we’ll discuss different candlestick charting techniques in detail.
History of Candlesticks Charting
Munehisa Homma, a Japanese rice dealer, introduced the concept of candlesticks charting patterns in the 18th century. Homma noticed that the rice market was impacted by the emotions of merchants while still admitting the demand and supply impact on the prices of rice.
Later on, the western world became familiar with the candlestick charting patterns when Steve Nison used and explained the notion in his book “Japanese Candlestick Charting Techniques” in 1991.
How does the Japanese Candlestick Charting work?
Compared to bar charts, Japanese Candlesticks give more comprehensive and precise price movement data. They show the supply and demand forces that drive price behavior.
The body of each candlestick reflects the price movement between the opening and closing points of underlying securities. While the upper wick indicates price distance from the body’s peak to the trading period’s high, the lower wick shows the price difference between the body’s bottom and the period’s low.
The security’s closing price determines the candlestick’s bullish or bearishness. If a candlestick closes higher than it opened, the body is white. In this scenario, the closing price is at the top while the opening price remains at the bottom.
The body fills up or turns black if the security traded closed lower than it opened. In this case, the body’s bottom is the candle’s closing price, and the top is its opening price. Modern candlesticks include more colors than white and black, such as blue, red, and green. Traders utilizing computerized trading platforms can select different colors for candlestick while setting up charts.
Reliability of Candlesticks Charting Techniques
Not every candlestick pattern works as anticipated. The popularity of candlestick patterns has diminished their dependability due to hedge funds and algorithms analyzing them. These well-funded traders employ lightning-fast execution against individual investors and fund managers who rely upon popular technical analysis tactics.
The five candlestick patterns below generally tend to work well for determining price direction & momentum. Each one interacts with the surrounding price bars to forecast price changes. Not to mention, these candlestick patterns are time-sensitive in a way that they only function inside the chart’s parameters (for instance, daily, weekly, or monthly), and their effectiveness rapidly diminishes 3 – 5 bars following the pattern.
Performance of Candlestick Patterns
This research is based on Thomas Bulkowski’s 2008 book “Encyclopedia of Candlestick Charts,” which ranked the performance of candlestick patterns. He provides stats for two predicted pattern outcomes, including reversal and continuation. While reversal candlestick patterns indicate a price shift, continuation patterns imply price extension.
The examples below show the empty white candlestick represents a higher closing print than the black candlestick.
Three-line Strike
Three black candles form a bullish three-line strike reversal pattern. Each bar closes near the Intrabars low, posting lower lows. However, the fourth bar reverses widely and closes above the series’ high. The opening point also prints the fourth bar’s low. It anticipates increased pricing with up to 83% confirmation, according to Bulkowski.
Image Source: Candlescanner.com
Three-black Crows
Three black bars close around the Intrabars lows in an upswing, forming a bearish three-black crows reversal pattern. This pattern implies further declines, possibly sparking a broader-scale slump. The most bearish variant starts at a fresh high (A on the chart), trapping purchasers into momentum trades. Bulkowski claims this pattern accurately forecasts decreased pricing 78% of the time.
Image Source: Candlescanner.com
Two-black Gapping
The two-black bearish continuation pattern forms after a noteworthy peak in an upswing, with a gap-down resulting in two black bars reporting lower lows. The pattern implies further declines, possibly sparking a wider-scale slump. Bulkowski claims this pattern accurately forecasts decreased prices with an accuracy of 68%.
Image Source: Candlescanner.com
Abandoned baby
In a downtrend, the black candles series prints lower lows before the emergence of the bullish abandoned baby reversal pattern. For Doji candlesticks having a small range, the market’s gap lowers on the next bar, but no new sellers appear. The pattern gets completed by adding the third bar and anticipates further gains, maybe sparking a larger-scale upswing. This pattern has a 49.73% accuracy rate, as per Bulkowski.
Image Source: Candlescanner.com
Evening Star
The evening-star bearish reversal pattern initiates with a towering white bar leading an upswing to new highs. This results in a tight range candlestick as the market gaps soar, but no new buyers materialize. On the 3rd bar, the pattern gets completed following a gap down, implying further declines and maybe a more considerable slump. Bulkowski claims this pattern accurately forecasts price declines by 72%.
Image Source: Candlescanner.com
Difference between Candlesticks Patterns and Bar Charts
The link between opening and closing price is displayed in candlestick charts by the body color, but it is shown by horizontal lines protruding from the vertical in bar charts.
The bar chart emphasizes the stock’s closing price relative to the prior period’s closure, while the candlestick variant emphasizes the close concerning the same day’s opening.
Traders can get the same information using Japanese candlesticks or bar charts. However, candlesticks are more visible, giving traders a better idea of price activity. They also show the dynamics (supply & demand) affecting price fluctuation over time. The upper and lower wicks of the candle’s body are called the shadows. The body length and shadows of the candlestick are crucial price indicators.
Conclusion
Candlestick patterns attract traders’ attention, but many of their continuation and reversal signals are unreliable in today’s computerized market. Based on Thomas Bulkowski’s data, a small number of these patterns provide traders with actionable sell and buy recommendations. Therefore, traders must learn to distinguish between profitable and unprofitable patterns.
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It is crucial to use effective chart patterns in technical analysis. Almost all levels of traders employ different chart patterns to identify market trends and anticipate market moves. Whether you trade the stock market or try your fate in forex, charting patterns have always had its place in the traders’ tool belt. This piece discusses one of the most popular charting patterns called Bull Flag in detail.
What Is Bull Flag?
A bull flag is a chart pattern that signals an entry into an uptrend. Many professionals adopt this pattern to flow with the trend. The bull flag pattern helps you participate in the present market trend. That implies you may use the data to find entry points where the risk is low compared to the potential gain. Visually, this pattern displays a solid upward movement (the pole) followed by a flag-shaped consolidation.
The flag is commonly a horizontal rectangle and is sometimes seen with a slant formation. Another variant is the bullish pennant, which involves consolidating a symmetrical triangle.
The psychology behind the pattern holds more significance than the flag’s appearance. Despite a robust vertical rebound, the stock refuses to fall much as bulls grab any available shares. That’s generally followed by a forceful upward rise, measuring the previous flag pole’s length. These chart patterns are called bear flags and pennants when used in reverse. Bull flags generally appear during a new market rally.
Flag patterns include five essential characteristics:
The preceding trend
Volume pattern
Consolidation
Breakout
Confirmation
Bullish Flag Examples
Let’s use price charts to understand the bullish flag concept and visual appearance.
Emerging Bull Flag
A breaking out flag is a good example of an emerging bullish flag. However, the overall pattern is more important than the fact that the flag doesn’t make a perfect rectangle. It rises sharply to create the flagpole, then settles firmly. Bulls don’t seem to be waiting for better pricing.
We can calculate the bull flag target by projecting the flag pole’s length from the breakout point. That’s how we get the target price of roughly $9.50.
Image Source: StockCharts.com
Rectangular Bull flag
Below is a pricing chart for America Service Group Inc. Also, the candles’ lengthy lower tails show definite purchasing every time it drops below $10. Volume has increased during the last two sessions. The volume pattern is a frequent feature of bull flags.
Volume usually spikes as the stock develops the flagpole. A pricing consolidation causes a drop in volume. Volume often increases somewhat when the bull flag is broken, but not drastically.
Image Source: StockCharts.com
Breakout Bull
The price chart of Cantel Medical Corp. looks to have broken out of a bull flag formation. CMN closed over the flag’s top near $15. While CMN may resume its parabolic advance, it is common for a stock to retest the breakout point after a few sessions, allowing for a second entrance.
Stop-loss protection for this sort of trade is flexible. For example, long-term traders frequently employ stop levels beneath the entire flag, while others use two-bar stops.
Image Source: StockCharts.com
Tight Bull Flag
The price chart of CF International Inc. shows a very tight bull flag. The tighter flags often perform better and have more manageable stop-loss levels.
Bull flags usually clear out in three weeks. More extended periods form a triangle or rectangle.
Following a consolidation week, ICFI pushes over the resistance region at $24.50, fitting the usual trend and pointing to a possible rally.
Image Source: StockCharts.com
Difference between Flag & Pennant
Flag chart designs resemble pennant patterns at first glance. Both flag patterns occur after a substantial price movement followed by a horizontal price movement. They usually last 1-3 weeks. However, there are various discrepancies among the similarities.
Pennants are usually triangular. Converging trend lines form them by successive highs and lows. It’s consolidated in a pennant shape, with sinking resistance & rising support. Generally, it would help be best to utilize pennants as part of confirmation along with other technical indications. Using the RSI (Relative Strength Index) to moderate during consolidation and attain oversold levels can be viable.
A flag pattern occurs when a substantial spike (or decline) is followed by a tight price range (or fall). A flag usually helps a candle close above a support or resistance level.
To trade successfully with flags or pennants, you should always use volume to determine your entry and exit locations. It will help you confirm breakouts and allow you to speculate on the following momentum.
Finally, there is no time lined defined for the pattern formation. Hence, waiting for the right time is all you can do.
How to Identify a Bull Flag Chart
The flag pattern looks rectangular; hence it might be difficult for new traders to spot it. Therefore, the need to be careful while identifying the bull flag pattern. Below are some tips to help you Identify the bull flag pattern quickly.
Step 1: The bull flag should have an uptrend since it’s a continuation pattern and isn’t a reversal.
Step 2: When the correction begins and the price drops. You may say it’s a bull flag.
Step 3:The retracement should not be less than 38%, and it’s not a bull flag even if it is below 50%.
Step 4: Draw lines parallel to the pattern.
Step 5: The underlying security price should surpass the pattern’s upper border.
How to Trade The Bull Flag?
After identifying the flag pattern, you should enter a position when the downtrend loses momentum.
A Long Entry
In this case, the long entry is at the flag’s break, while the stop level is below the flag’s consolidation. Keep previous swing high as your primary objective. A strong market trend would make the price continue moving in the same direction.
Trade management differs. It depends on each trader’s style. Still, closing a position around the previous swing high could be a sensible move. You can then define a trailing stop based on trend line or moving average.
Below is an example of a BTCUSD weekly chart showing how to detect and trade a bull flag.
1) As stated previously, the dominant trend must be positive. This momentum is frequently framed by a series of bullish bars with slight correction.
The picture below shows significant directional movement with just minor retracements.
2) We must await consolidation. In this situation, a downtrend channel may be created once a lower high is reached, and we can prepare for a flag break.
The price breaks the flag, triggering the long entry. You may set a stop loss on the other side of the flag’s pattern.
The red region shows the possible risk (loss), while the green area reflects the potential reward (gain).
Activating the entry is followed by a waiting period. In this case, the price jumps to the last swing high.
Trade Management
Traders need to manage their trades based on their risk appetite. You can close a portion of your position near the target region and keep the rest open.
You can also project the price range of the flagpole upwards and close the entire trade. The price may continue rising to new highs.
Pros and Cons of Bull Flag
The bull flag has the following pros and cons.
Pros
Traders may find it while trading any market, including forex, stocks, indices, cryptocurrencies, etc.
There is no specific timeframe to spot the bull flag. Instead, you may find it on any period, such as M1, H1, W1, and MN.
It helps clients find an optimal entry-level
It provides uptrend continuation signals to clients.
Cons
Newbies might find it challenging to interpret.
It doesn’t frequently appear on charts.
It might become difficult for traders to distinguish between Bull flags and rectangular patterns.
It may produce false signals sometimes.
Conclusion
No chart pattern or indicator can offer absolute assurance concerning whether a trend will reverse or continue. Therefore, it’s best to use this if it fits your strategy, then follow your trading plan and let probability play out. If you’re looking to learn more about indicators, candlestick patterns, etc. do check out the Traders Central Academy.
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When the market appears strongly bullish, a segment of traders may anticipate a trend reversal, and choose to sell. On the other hand, some may prefer to watch the market during an indecision phase and forecast market developments based on technical analysis. Primarily, it is through specific candlestick patterns formed on charts, that technical traders base their decisions off of. Doji candlesticks is one such candlestick pattern. While there are different types of Doji candlestick patterns, we’ll discuss the Doji Star in detail in this article.
What Is Doji Star?
A Doji Star is a three-column candlestick pattern that indicates a possible market trend reversal. Usually, traders find it in bullish and bearish variants depending upon the prevailing trend. To comprehend the Doji Star pattern, one must first understand the Doji candlestick pattern.
A Doji appears when a candle’s starting and closing prices are almost identical. Doji has a body that resembles a cross or a plus sign. In auction theory, Doji signifies buying and selling uncertainty. Some technical analysts interpret Doji as a retracement. However, this is when buyers and sellers acquire momentum for future trends. When they arise during the integration phase, Dojis can assist analysts in spotting price breakouts.
Technical Analysis – Doji Star
Technical analysis is the study of chart patterns & price movements to predict future price changes. While analyzing Doji candles, traders seek answers to the following questions:
What is the current situation on the price chart before the appearance of Dojis?
Is the price trending upward or reversing in an uptrend (a pullback)?
They may also try to figure out if the price is going in a triangle or sideways? Lastly, technical analysts might wish to confirm a support or resistance level near the Doji pattern?
These scenarios help analysts predict an instrument’s price movement after a Doji. In addition, technical analysis help traders to identify trade opportunities in Doji candlestick patterns. Let’s look at different types of Doji Star and discuss some trading ideas.
Types of Star Doji Candlestick Patterns
There are two Doji Star candlestick patterns, including bullish Doji Star and bearish Doji Star.
Bullish Doji Star candlestick pattern
Bullish Star Doji comprises a three-bar downtrend formation pattern. The first bar is long and dark, while the second is relatively shorter, replicating a Doji with a narrow trading range. Its third bar closes above the middle.
Bullish Star Doji candlesticks indicate a market reversal from the present downturn and are considered purchase indications. Traders use them to track the time to hold their positions. It typically forms at a chart’s bottom, signalling the end of a protracted bearish period.
Bearish Doji Star candlestick pattern
Bearish Star Doji candlestick appears during an upswing. It’s a bearish reversal pattern, and two candles depict it. The first candle’s body is lengthy because of the rise during an uptrend. Doji opening and closing above the first candle appears afterwards.
How to spot a bullish Doji Star?
Look for a standard red candlestick at the chart’s bottom on the first day. It verifies the general downward trend and shows that the price closed below the opening price. A little Doji on the following day means there is little or no gap between the price where the candle opened and closed. Next, look for a gap-up on the third candlestick.
Example
The chart below for Brent Crude Oil (WTI) shows two bullish stars forming following a price dip. The price gap is narrow, creating a star before rising again, confirming a bearish price reversal.
How to spot a bearish Doji Star?
Identifying a bearish Star Doji isn’t tricky. The first candle should have a lengthy white line and a Doji above it. Remember, Doji’s shadow won’t have excessive length, and the line’s shadow does not overlap.
Example
Following a price gain, a bearish star Doji signalled the commencement of a short-term downslide in the given below chart for the U.S SPX 500 index.
How to trade a bullish Doji Star?
Consider entering a long trade with a stop loss to protect yourself if prices start moving in the opposite direction. You may also examine the 5 and 15 minute time frames to study the trend and adjust your protection. Prices begin to rise when the bullish Doji Star pattern forms. So, if you trade after this pattern is confirmed, you can make some potential profit.
How to trade a bearish Doji Star?
A bearish Doji Star signals the conclusion of an uptrend and the beginning of a downtrend. Therefore, when you spot a bearish Doji Star pattern, it is better to shorten your position right away.
Limitations of Doji
The Doji candle is a non-directional indicator that gives minimal data. Since Dojis are rare, they can’t reliably identify price reversals. After the candle is validated, the price may not move in the predicted direction.
Dojis tail or wick combined with the confirmation candle’s magnitude might indicate a trade entry location distant from the stop loss. Traders must locate another stop-loss position or exit the trade if the stop-loss is too far.
Calculating prospective Doji trading gains also becomes challenging since candlestick patterns seldom indicate price goals. Therefore other candlestick patterns, technical indicators, or tactics in conjunction with Doji can help you exit the trade profitably.
Conclusion
Assuming you have learned how to read market trends, structure, technical and fundamental data; using Doji star candlesticks patterns will be a nice addition to your toolbelt. First, however, do not forget to employ Doji Star candlestick patterns with other indicators. Relying solely on Doji star candles might not be a great idea. It’s always best to develop a strategy with a positive edge in the markets and use these patterns or indicators as confirmations for entry. Backtesting on past data is always the best way to do it and later on you can also try your strategy in live markets to validate it.
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Frequently Asked Questions (FAQs)?
What does a Doji tell you?
A Doji candlestick emerges when an underlying security’s opening and closing prices are almost equal and often signifies a reversal pattern. Doji means error or mistake in Japanese and refers to the rarity of the open and closing price being the same.
How to read Doji?
Doji patterns have two lines, one vertical and one horizontal. Length of wick might vary depending on price action. The body indicates the difference between the closing and opening prices.
What does a bullish Doji Star mean?
The Doji Star Bullish Candlestick Pattern is employed in technical analysis to determine when a protracted decline will reverse. It refers to the unusual phenomenon of a security’s opening and closing prices being almost identical.
What does a bearish Doji Star mean?
A Bearish Doji Star candlestick pattern implies that buyers are losing power, and the market is in a bind in an upswing.
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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Understanding candlestick patterns is critical in technical analysis, and there are over 30 candlestick patterns. However, Doji candlestick patterns are the most common. While Doji Candlestick patterns can help traders make informed decisions, they can sometimes lead to false information. This piece will explain the Dragonfly Doji candlestick pattern, its components, how to trade it, and its limitations.
What Is Dragonfly Doji?
The Dragonfly Doji is a bullish reversal candlestick pattern usually formed at the lows of downtrends. Besides enabling traders to see support and demand, it can help investors detect an uptrend when coupled with other indicators. The Dragonfly Doji candlestick appears when the open, high, and closing prices become almost identical. The Dragonfly’s long lower shadow reflects that aggressive selling occurred during the underlying time that buyers counterfeited as the price closed near its origin.
What Does Dragonfly Doji Indicate?
After a downtrend, the Dragonfly Doji candlestick indicates that the price may rise. On the other side, the uptrend anticipates more sellers entering the market. Therefore the price could decline.
In either case, the candle that follows the Dragonfly Doji must confirm the market direction. The Dragonfly’s long lower shadow suggests that sellers had control for part of a price advance. While the price remained unchanged, the increase in selling pressure triggers a warning sign that the price trend might change. The candle appearing after a bearish dragonfly must confirm the reversal as it closes below the dragonfly candle. The reversal signal is invalidated if the price tends to rise on the confirmation candle.
Using Dragonfly Doji in conjunction with other indicators is best, as the candlestick patterns can indicate both indecision and reversal. Unreliability is associated with low volume Dragonfly Dojis. The confirmation candle should have a high price and significant volume.
Another possibility is that the Dragonfly Doji appears at the end of a head and shoulders chart pattern. Anyhow, traders should not entirely depend on a single candlestick pattern in any case.
Dragonfly Doji Examples
Since it is rare for a candle to have open, close and high prices to be almost in the same area, Dragonfly Dojis are not very common. Usually, all three prices do have minor differences. For instance, given below is an example of a Dragonfly Doji appearing in the sideways of a long-term uptrend. As the Dragonfly Doji moved lower, buyers quickly swept it higher.
The price moved higher after the Dragonfly Doji appeared, confirming the price retracement. Traders usually buy or sell their positions after the appearance of the confirmation candle.
Traders can witness the Candlesticks’ versatility as a slight drop in the price followed by a push higher confirmed the price was likely to rise further. Not to mention, the dragonfly pattern and the confirmation candle signaled the end of the short-term correction and the start of the uptrend.
This candlestick pattern implies different meanings when it appears in an uptrend or downtrend. Let’s discuss it below.
Dragonfly Doji in Uptrend
In a bullish trend, Doji candles always signal danger. A Dragonfly Doji candle appearing in an uptrend shows uncertainty in the market. It indicates a 50% price reversal or range before continuing upward movement. The next candlestick on every chart should confirm the Dragonfly Doji candle price action.
In the image below, a daily bearish Dragonfly Doji indicates a price reversal.
A bullish Dragonfly Doji followed a bearish one on a daily chart and prevented the price from falling. As a result of the candles’ strengthening, the price kept rising.
Dragonfly Doji in Downtrend
The downward trending candlestick is defended and pushed up by bulls to close almost precisely on the opening price. Thus, a Dragonfly Doji candle can signal price exhaustion and reversal. Also, it is pertinent to note the point when the candle appears since its formation near support could be a specific support level such as Fibonacci level, moving average line, historical support level, or Bollinger Bands lower band.
As seen in the image below, a daily bullish Dragonfly Doji showed a price retracement before continuing to fall.
A daily Bearish Dragonfly Doji formed below the support line, but the price did not retrace.
Trading the Dragonfly Doji
How to Trade a Dragonfly Doji?
As discussed above, It is rare for Dragonfly Doji to appear on charts. Therefore, it is comparatively difficult to open or close positions based on Dragonfly Doji candles. There is always a risk that traders might get confused while identifying the Dragonfly Doji. Mixing it up with a hammer candle or hanging man candle can lead investors to false interpretation. A T-shaped candle having a small body indicates that the price dropped below the opening price but closed on the same level after reverting.
Confirmation of Dragonfly Doji
Paying close attention to the candle appearing next to the Dragonfly Doji is crucial. For instance, a hanging man candle in an uptrend offers a high probability of reversing the price trend. However, be cautious since the price reversal pattern can also be false positives when appearing in higher time frames.
Upon reaching a resistance level, the formation of the Dragonfly Doji might indicate a temporary price reversal, but you should check it with further price action for confirmation.
Initiating a Dragonfly Doji Trade
Entering a position based on Dragonfly Doji carries increased risk since it signals the market’s uncertainty. Therefore, you must not forget to incorporate stop-loss while initiating a trade and open a position only after the appearance of the confirmation candle.
Difference Between Dragonfly Doji and Gravestone Doji
There is no difference between the practical implication of Dragonfly Doji and Gravestone Doji, as both suggest price trend reversals followed by confirmation candles. However, they look like opposite of each other. Dragonfly Doji is T-shaped with a long lower shadow, while Gravestone Doji appears as an inverted T with a long upper tail.
Limitations of Dragonfly Doji
Initiating trades based on Dragonfly Doji can be tricky since it only appears occasionally. Also, there is no assurance the market might move in the anticipated direction even after the appearance of a Dragonfly Dogi and the confirmation candle. Hence, relying on a less common technical indicator for spotting price trend reversal isn’t worth it.
Because of the magnitude of the Dragonfly Doji and the confirmation candle’s size, the entry position for a trade can be a long way from the stop-loss. It implies traders will either need to relocate their stop loss or abandon the trade position because a large stop-loss is less likely to justify the potential gain.
Secondly, you can’t estimate the potential gain reliably since Dragonfly Doji doesn’t help you define price targets. However, it will help incorporate other technical indicators and candlestick patterns while profitably exiting a trade.
Conclusion
Doji patterns imply a price transition or the market’s uncertainty about the future direction of pricing. Instead of a continuation or reversal pattern, these patterns are better classified as transitional candlestick patterns as a whole. Specific patterns, such as the Gravestone Doji or the Dragonfly Doji, indicate a potential price reversal, but they work best with other technical indicators.
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