Trading with the long legged doji candlestick
Table Of Contents:
- Trading with the long legged doji candlestick
There are quite a few candlestick patterns that are widely recognized. One of the benefits of using the candlestick patterns is that they also give meaning to the market structure at a macro level.
For example, if you were using a 5-minute chart, then based on the candlestick analysis you would be able to tell what is happening in the markets. Likewise, another trader who is looking at the daily chart time frame can also apply candlestick analysis to understand what is happening on the day.
Among the many candlestick patterns, the long legged doji is something that has caught the trader’s attention. This is because these patterns occur during specific market event. The very nature of the long legged doji thus gives rise to potential trading opportunities.
At the initial glance, the long legged doji might look somewhat similar to other doji patterns. In fact there are various doji variations that you will come across. So the question that you might ask is what makes the long legged doji so unique?
As you will discover in the next sections of this article, the long legged doji has some sense of uniqueness and brings meaning especially when and where it occurs. Traders take this as a cue to prepare for what’s to come next.
As with all candlestick patterns, the long legged doji can be combined into other technical trading strategies as well. Traders generally use the candlestick patterns as a means to validate the trading signals generated from the trading systems.
This prevents traders from any false signals that indicators might send. The technical indicators that you use are obviously derived from price itself. Therefore, they are lagging in nature. In contrast, the candlestick patterns are more leading in nature and exhibit the current market conditions.
So, traders can combine the previous market structure along with the current market structure in order to identify the right time to trade. But before we get into further details on how to trade with the long legged doji candlestick pattern, let’s first explore the characteristics of this candlestick pattern.
What is a long legged doji?
As the name suggests, the long legged doji belongs to the doji family of candlestick patterns. The name doji is given to a candlestick when the opening and closing prices are the same but the session’s highs and lows are quite big.
This leads to prices going nowhere expect for establishing a wide range on the day. It is widely understood that the appearance of a doji candlestick pattern happens when the market loses its sense of direction.
Due to the fact that the open and close prices remain the same, it indicates that both buyers and sellers are in control. Many traders mistake the doji candlestick pattern to be a reversal candlestick pattern.
That is not true. This makes the doji candlestick pattern quite unique from the rest. Analyzing the doji candlestick pattern in isolation does not give any major benefits. In fact, besides the point about telling you that the markets are flat, they do not give out any further information.
Therefore, the doji candlestick pattern needs to be looked from what happened prior to the appearance of the doji and what happens after the doji pattern is formed.
Doji candlestick explanation
In the above chart we have two areas where the doji candlestick pattern was formed. You will notice how differently price behaved in both these scenarios.
In the first instance, we see a doji pattern emerging after a previous uptrend turned flat. Price failed to post any meaningful highs. Following this flat price action, the doji pattern appeared. Right after the doji pattern, we have a bearish close.
From here on, price turns direction and switches to a downtrend. This is a reversal doji candlestick pattern in play.
On the right side, we have another doji pattern that was formed. In this instance, it forms right after price moves into an uptrend over a few sessions. In this example, a doji pattern formed but then the next candlestick closed bullish.
Notice that the close of this candlestick pattern was above the doji’s high. The bullish close signifies that the bulls are in control. Evidently, price embarks on a strong rally from here on. In this example, we can categorize the doji candlestick pattern to be a doji continuation pattern.
From the above two examples, we see that treating the doji candlestick pattern in isolation can be very disastrous to your trading. You need to build the market context and also look at the recent price action before and after the appearance of the doji in order to be sure about what is happening in the markets.
So far we explored how the doji candlestick pattern works. This is the most basic that you need to know before we go into explaining the long legged doji. The same principles applies when you are dealing with the long legged doji.
In other words, the long legged doji should not be treated in isolation but you need to apply the market context to understand what is happening in the markets.
The next chart below gives an example of a long legged doji.
Long legged doji example
In the above chart, we have an example of the long legged doji. This candlestick pattern is unique due to the fact that it has a wide range. The wide range is nothing but the difference between the high and low of the day.
This is what makes the long legged doji unique from its doji family of candlestick patterns. The range is relatively high compared to the body (the open and close). Waiting for the perfect long legged doji will of course mean having to stay out of the markets for long periods of time.
The long legged doji can appear in any market and across any time frame. Instead of waiting for the long legged doji to appear, traders should on the contrary be aware when this candlestick pattern emerges.
The next question that comes to mind is what is the meaning behind the long legged doji.
How to trade with the long legged doji candlestick pattern?
The answer is very simple. Firstly, the long legged doji is characterized by the relatively high and low prices. This tells you that the market tried to push prices to test the highs and lows of the session but was rejected.
Later, the buyers and the sellers fail to overwhelm the other party, leading to a flat or a near flat close on the long legged doji. As we mentioned earlier, finding the perfect long legged doji is rare. Therefore, you need to be a bit subjective when it comes to trading with these patterns.
The long legged dojis are however commonly found around key market events. We know that price discounts all the news there is. But in the event of an unexpected announcement or a surprise from the fundamentals, it can lead to prices moving around leading to the formation of the long legged doji pattern.
Below is an example of a perfect long legged doji candlestick pattern.
Long legged doji formation in gold, H4 time frame
You will notice that the long legged doji holds its prominence regardless of the time frame that you choose. Therefore, it makes it easy to trade with this candlestick pattern whenever it occurs.
Typically, the long legged doji appears more on smaller time frames compared to larger time frames. This simply indicates the level of action in the markets. Because short term news events tend to push prices around, the long legged doji can be found more frequently on the one-hour or lower time frame charts.
In the above example, we have two long legged doji patterns that have formed. The first one at the bottom shows how price was trading flat prior to the formation of the long legged doji.
Following this, price then breaks out from the doji’s range and closes higher. This instantly indicates that price will be moving to the upside. As you can see from the chart, price does indeed rally a few points higher.
After reaching the top you will find the formation of another long legged doji. In this example too, price trades flat at the top. After briefly breaking the low of the doji, price quickly moves back into the range.
The gains in the price action see’s price rising close to the high but fails to break past it or even touch it. This results in further sideways movement of the price within the long leged doji’s range.
The final break down to the downside then results in prices moving in a steady downtrend.
From the above, you can see that you can gain a lot of market context by simply observing the price action. We do not make use of any technical indicators whatsoever.
This makes the long legged doji so unique.
Some common ways you can trade with the long legged doji includes:
• Moving average bounce: If you apply a 200-day moving average or a 50-day moving average to the chart, the appearance of the long legged doji which pierces the moving average is a good indicator that price could either rebound or break through the moving average. As outlined earlier in this article, you wait for the next session to close to understand what is happening.
• Long legged doji near support and resistance levels: The appearance of this candlestick pattern near key support and resistance areas are also good indicators of price rejection. In this aspect, you could see that price tested the support or resistance but failed to close any higher. Following the formation of the next candlestick pattern you could anticipate a potential reversal off the support or resistance level.
• Bollinger bands piercing: The long legged dojis can also be used with Bollinger bands. In this scenario, these doji’s tend to pierce the upper or the lower Bollinger bands. This can signal a possible reversal provided it is validated by a candlestick that closes in the opposite direction. The width of the Bollinger bands also need to be accounted for in such cases before you start trading.
The long legged doji candlestick pattern – Conclusion
In conclusion, the long legged doji is visually different from most of its other doji peers. The appearance of the long legged doji can signal different things. Price can continue its previous trend or price can reverse.
The long legged doji should therefore not be analyzed in isolation. Rather, you need to take into account the whole market structure and build the context before you can trade it. Because the long legged doji basically represents price, you can use this as a leading market indicator.
The long legged doji can be combined with various methods of technical analysis such as Elliott waves, support and resistance or even with technical indicators such as moving averages and oscillators.
Depending on what markets you trade, the long legged doji can further provide influence when you also account for volume. Therefore, this pattern can be used more confidently in stocks and futures where volumes are accurate and centralized.
The bottom line is that there is nothing fancy about the long legged doji. The basic behavior of the market is the same as it would be with any other doji variation. The only unique thing is that the wide range that the long legged doji exhibits. It is this factor that can tell you that the markets are exhausted and that there is practically no direction.
The long legged doji candlestick pattern forms more frequently on lower time frame charts. Therefore, for those traders who want to try out this candlestick pattern, you can find most of these patterns on smaller time frames.
In conclusion, the long legged doji candlestick pattern is something that traders need to be aware of. It can be useful for you to exit your existing positions or to initiate new positions in the market. Regardless of which time frame the long legged doji pattern is formed, they hold the same meaning and give the same level of validity.