DEFINITION of Long-Legged Doji
The long-legged doji is a candlestick pattern that consists of long upper and lower shadows and has virtually the same opening and closing price. The candlestick signals indecision about the future direction of the underlying security.
Example of a Long-Legged Doji
BREAKING DOWN Long-Legged Doji
Long-legged doji candles are deemed to be the most significant when they occur during a strong uptrend or downtrend. The long-legged doji suggests that the forces of supply and demand are nearing equilibrium and that a trend reversal may occur. The pattern can be found across any timeframe but has greater significance on longer-term charts as more participants contribute to its formation. The long-legged doji should be used with other technical indicators to increases the chances of a reliable trading signal. It is part of the broader doji family that consists of the standard or neutral doji, dragonfly doji and gravestone doji.
Long-Legged Doji Psychology
Traders typically use the long-legged doji to help identify a shift in market sentiment. Indecision enters the market after the bears (in a downtrend) fail to close the price lower than the open to continue the trend. Buyers enter during the period but do not have the confidence to close prices higher. The indecision in the market may be a catalyst for a reversal in price.
Long-Legged Doji Trading Considerations
The below assumes the long-legged doji appears in a downtrend:
- Entry: Traders can enter the market immediately after the long-legged doji closes, or wait for subsequent price action to confirm the pattern. Price confirms the pattern is valid on a close above the candlestick’s upper shadow. To avoid waiting for price action to confirm the signal, traders could pace a buy stop-limit order just above the high of the long-legged doji.
- Risk Management: Ideally the low of the long-legged doji is the lowest price of the downtrend. Traders could place a stop-loss order beneath the pattern, or the lowest surrounding price bar. A time stop might also be used where the trade is closed if it does not move a specific distance from the entry within a given time period. For example, if the trade has not moved 5% within a week, it is closed.
- Market Structure: The long-legged doji is more likely to give a valid signal if it appears near a major support level. Support can come from a previous swing low, a lower channel line or price support on a different timeframe. For example, the pattern might have little support on the daily chart but be at a significant support level on the weekly timeframe. Traders can also use technical indicators, such as the stochastic oscillator to ensure the market is oversold before taking an entry. (For further reading, see: Candlesticks and Oscillators for Successful Swing Trades.)