Today we’re looking at the long-legged doji candlestick pattern.
We’re going to look at some specific examples and discuss how to trade them.
Phases of consolidation and indecision are the order of the day in the capital markets.
These periods are characterized by a balance between buying and selling pressure, resulting in narrow price ranges.
A long-legged doji candlestick pattern is one such pattern that confirms that the market has entered a period of indecision with no sustainable direction for price action.
As part of the Doji family, a long-legged Doji candle is created when the opening and closing prices are almost the same.
Therefore, the resulting candle has long wicks and a small body on both sides, top and bottom.
The long-legged doji occurs whenever there is a balance in the market between buyers and sellers.
The absence of an imbalance causes the price of the underlying security to lose direction.
If the price is trending up or down, it can fall back over a wide range for some time until an imbalance occurs.
The long-legged candlestick pattern indicates that neither buyer nor seller is in control. Since there is no direct winner between the two, the price doesn’t change much.
In this case, a candle opens and closes at almost the same price.
A long-legged candlestick pattern signals indecision about future price developments.
Given the balance between buyers and sellers, it becomes extremely difficult to predict which direction price will go.
Sometimes the candlestick pattern can signal the beginning of a consolidation in the market, with the price hovering in a narrow range oscillating between support and resistance levels.
The long legged dojis are most important when they occur after strong upward or downward trends.
When they do occur, they can signal that a balance between buyers and sellers is approaching.
Consolidation can also come into play, after which the price may move further in the direction of the underlying trend.
In addition, the candlestick pattern can cause trend reversals.
The following chart shows the appearance of a long-legged Doji candle at different stages of price movement.
For example, the first long-legged Doji candlestick is immediately followed by a price reversal from an upward trend.
The price reversed and continued to decline as the candle closed immediately after the long-legged doji below.
By closing the bottom, the long-legged doji, the following candle signals sellers that they have regained control, pushing prices down.
The second long-legged candle does not reverse the small upward trend. Instead, it causes the trend to continue once buyers regain control.
The candle immediately after the long-legged Doji candle closed higher.
The closing price signaled that the bulls will remain in control after consolidation and therefore likely to drive prices higher.
From the two examples, it is important to build the market context once the long-legged doji happens.
Treating the pattern in isolation can be disastrous for anyone looking to predict the exact direction in which price is likely to move exactly afterwards.
Doji patterns with long legs are characterized by high and low prices.
However, given the rejection that comes into play, the price often closes near the opening point, resulting in long wicks on the candlesticks.
Since the long-legged Doji candlesticks occur in smaller time frames compared to larger time frames, it is important to be patient and wait for confirmation signals.
The best trading opportunities will come into play once the dust settles.
So pay close attention to the candlesticks that follow the long leg doji.
The candle will shed light and signal who is in control.
In the chart above, there was a long-legged candle at the bottom, indicating a period of indecision between buyers and sellers.
However, the next candle provides the much-needed clue as to the direction that price is likely to move. The candle closed over the doji, signaling buyers that they are in control
A long-legged Doji candle appears at the top of the uptrend and ends at the same point that the previous bullish candle closed.
The next candlestick after the long leg doji clearly shows that the uptrend has lost momentum and a reversal is in the game.
The closure of the candle is much lower than that of the long legged Doji candle signals, the bears are in control and are likely to push prices down.
While trading, it is important to be extremely careful with the appearance of long-legged Doji candlesticks near support and resistance levels.
The appearance of these candlesticks could signal a price rejection. If they appear near resistance levels, a reversal could occur, causing prices to fall from an uptrend.
Similarly, a reversal could cause the price to start an uptrend if it occurs near a support level.
A long-legged doji candlestick is an indecision candlestick that signals a period of uncertainty in the market. Its appearance in price action can signal different things.
For starters, it could signal a potential price reversal from the previous trend. It could also signal consolidation after which price breaks out in the direction of the underlying trend.
Therefore, the long-legged Doji candlestick should always be analyzed with the whole market structure in mind and not in isolation.
Also, watch out for confirmation candles.
Disclaimer: The information above is for For educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are unfamiliar with exchange-traded options. All readers interested in this strategy should do their own research and seek advice from a licensed financial advisor.