Long-legged Doji Candlestick Trading Tutorial and Example
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The long-legged doji candlestick patterns is one of the most commonly forming patterns on the price charts of stocks, ETFs and stock market indexes. The formation of long-legged doji indicates a state of indecision about the future direction of the price movement of the security.
Active and passive traders who follow price charts often use the long-legged doji candlestick to decide their future course of action in the market. As the formation of long-legged doji candlestick indicates indecision, the prior history and context gains significance. For example, the formation of long-legged doji candlestick following a strong upward move in the stock price may indicate that the market is now getting into an undecided state and it is likely that the stock's upward move may come to a halt or may reverse to proceed with a downtrend over the following period. Formation of multiple long-legged doji candlesticks in quick succession may indicate a consolidation - that is, the stock price may remain confined to a tight upper- and lower-range for some time.
Construction of the Long-legged Doji Candlestick
The long-legged doji candlestick is formed by any standard doji candle which has a very small body and considerably large shadows or wicks on upper and lower sides. As the body is relatively small, it means that the opening and closing prices are the same, or in a very close range to each other.
The upper and lower shadows (also known as wicks of the candle) are very long relative to the body. That means the high and low prices are quite away from the open and close prices.
Additionally, the body of long-legged doji is usually located somewhere in the middle of the candle or nearly in the mid-range of the candle. Overall, the long-legged doji appears as a long line, where the 'long legs' refer to the shadows or wicks of the candle, while the 'doji' indicates the small size of the candle body.
Color of the long-legged doji does not matter. It can be green or red, but traders following the confirmation candle method must be watchful of the color of the confirmation candle as that trend continues. If confirmation candle is green, the uptrend is expected to follow, and vice-versa. This is how a typical long-legged doji candlestick appears:
Trading the Long-legged Doji Candlestick
The long-legged doji forms quite frequently on the price charts of all kinds of assets - be it stocks, indexes or exchange-traded funds (ETFs). Therefore, it may be a lot tempting to go for trading every single long-legged doji that gets formed. However, it is an extremely important to know that trading on the formation of the long-legged doji depends upon the context and trend, and trading decision should be taken based on the type of situation that leads to formation of the long-legged doji.
Long-legged dojis gain significance when they are formed during the uptrend or the downtrend. The stronger the trend in any direction, the more prominence is gained by the long-legged doji. It is indicative of market forces being in near equilibrium, that is - both the buyers and sellers are equally strong, and none is able to outbid the other. Hence, it is a state of indecisiveness for future about whether the current trend will continue, or will it reverse.
Depending upon their trading style and experience, different traders use long-legged doji candlestick differently. A few traders enter into the trade on the formation of the long-legged doji candle pattern, while few others wait for the next candle to be formed (often called the confirmation candle), to observe which way the price is moving after the formation of the long-legged doji.
The first set of traders who act immediately on the formation of the long-legged doji keep strict stop-loss and profit levels and exit the trade as soon as either of the levels is hit. Additionally, such traders may also look for the location of long-legged doji formation. They enter the trade only when the long-legged doji is formed at the upper or lower Bollinger band breakout, or at the breakout of the trend-line (like 200-day moving average), or similar other range breakouts. The larger the breakout, the stronger the reversal pattern. If the long-legged doji is formed in the middle Bollinger band or far away from the trend-line (without breaching the trend-line), then the traders may not consider it as a strong reversal signal and they avoid the trade. When formed around the middle band or away from the breakout range, the long-legged doji mostly leads to continuation of the existing trend.
The second set of traders who wait for the confirmation candle to be formed take their positions only after the direction is confirmed - whether the existing trend is continuing (false reversal signal by long-legged doji) or the trend reverse as confirmed by the direction of the confirmation candle (positive signal by long-legged doji). The confirmation candle(s) may still be another doji, which is a candle with a relatively small body size and relatively long wicks or shadows. This scenario further confirms the indecisive state of the market, and adds to the possibility of the trend getting reversed.
Trading Scenario for Long-legged Doji
Here are the general considerations and scenrio for trading the long-legged doji candlestick.
▶ Trade Entry: Formation of long-legged doji during an uptrend is taken as a sign of reversal, that is - the market is expected to go downward in future. So traders take a short position at or around the low price of the long-legged doji. If formed during a downtrend, then take a long position at or around the high of the long-legged doji.
▶ Stop-loss Limit: The stop-loss varies from trader to trader based on their individual trade preferences, but usually while going long they set the stop-loss at the low price of the long-legged doji, and while going short they keep the stop-loss at the high price of the long-legged doji.
▶ Profit-levels: Traders should follow a risk-reward ratio to determine the possible profit level from their long-legged doji trading. For instance, if the stop-loss limit is set at $1 (the maximum loss one is willing to take) and the risk-reward ratio one follows is 1/2, then one must take profits when it hits $2. If the risk-reward ratio being followed is 1/3, then one must aim for profits when the price hits a level that generated $3 for every $1 stop-loss set.
▶ Market Conditions: More volatile stocks with high beta values often tend to have high occurrences of long-legged doji formations. Therefore, stock selection is important while taking on long-legged doji-based trading. Along with the above mentioned long-legged doji formation requirement, traders should ensure that their selected price range, bands or trend-line limits are getting breached. This ensures higher success rate of profitability. Although one must note that trading on technical analysis like candlestick patterns has limited success rate, so following strict stop-loss, disciplined trading and efficient capital management is advised.
Example of Long-legged Doji Candlestick
The following chart of Tesla Motors Inc. (TSLA) stock price shows multiple instances of long-legged doji candlesticks marked as 1, 2 and 3: As one can observe, the formation of the first long-legged doji candle reversed the uptrend that preceded the doji candle, and led to a downward move indicated by the red arrow. The trend reversal was also confirmed by the two red candles that were formed immediately after the formation of the first long-legged doji candle. Next is long-legged doji no. 2, which reversed the downtrend and led to an uptrend marked with green-colored arrow. The third long-legged doji candle that formed at the top of the uptrend led to the downward move. Traders usually set their profit targets and stop-loss levels based on the risk-reward ratio of their choice as mentioned in the previous section.
Latest Long-legged Doji Formations
FKnol.com has a dedicated section on candlesticks where the list of stocks, ETFs and indexes forming long-legged doji candles is updated on a daily basis. At present, the following stocks have formed the long-legged dojis as of the mentioned date (in reverse chronological order): 1) On Tuesday, Jul 27, 2021, the stock price of Technology sector based Twitter, Inc. (TWTR) formed the following Long-legged Doji Candlestick pattern:
...and there's more. FKnol.com everyday checks the stock price and candlestick formation across hundreds of stocks, ETFs and indexes to look for long-legged doji formations. Please see the full list of recent long-legged doji formations for: ▶ Full list of recent Long-legged Doji Stocks ▶ Full list of recent Long-legged Doji ETFs ▶ Full list of recent Long-legged Doji Indexes
The Bottom Line
Trading candlesticks like the long-legged doji needs strict discipline and emotion-free trading. Candlestick trading is a part of technical analysis and success rate may vary depending upon the type of stock selected and the overall market conditions. Use of proper stop-loss, profit level and capital management is advised.
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One can also explore the similar candlestick formations on various dates using the below screener: