If you are into trading and want to understand technical analysis, one of the first terms you will chance on is a candlestick. A candlestick is a kind of chart that shows you the open and close prices of a stock apart from the high and low for a particular time frame.
Candlesticks, a Japanese tool used by merchants to track prices of rice, became a popular aspect of technical analysis the world over. Typically, a candlestick chart shows the price movement for a day.
What characterises a candlestick chart?
1. A candlestick chart is characterised by the body and shadows.
2. The wide part is called the real body, and it shows the range of price movement between the opening and closing of the trading day.
3. The protruding thin lines are called the shadows and they depict the low and high prices for the day.
4. The upper shadow or line is often called the wick, while the lower is called the tail.
There are many kinds of candlestick patterns, and one of them is called the long-legged doji. The word doji in Japanese means a mistake or anomaly but in trading terminology, doji refers to a unique incident when open and close prices of a stock are the same. This is indicative of indecision in the market when neither bears nor bulls hold the reins. The long-legged doji candlestick pattern is one of the five doji candle patterns. The others are standard doji, dragonfly doji, gravestone doji and price doji.
What is the long-legged doji candle?
A long-legged doji candlestick pattern looks like a cross. Here’s how it can be broken down:
1. The body is very tiny or doesn’t exist.
2. The close and open prices are in the candle’s mid-range
What does it say about the market?
A long-legged doji candle has extremely long shadows, and is indicative of two equally strong forces but in opposition to each other. It thus reflects indecision.
When a long-legged doji forms during strong downtrends or uptrends, it means that there is a move towards equilibrium between supply and demand. In such a scenario, there are strong indications of the trend reversing.
For instance, when the long-legged doji candle appears during a bullish trend, there might be a reversal. The buying pressure grows stronger initially but soon, there is fear of a reversal of trend, and traders start selling positions, which leads to a drop in price. There sia tug of war between two pressures, ie, buying and selling, and eventually the closing price gets pushed back to the level of the opening price.
How to trade the long-legged doji?
- – The long-legged doji is indicative of indecision, so as a trader, you could take a wait and watch approach to see if the price moves beyond the high and low of this doji. When the price moves above, you could make a long position entry and if it moves below, then a short position may be feasible.
- – You could apply moving average to the chart, and see if a long-legged doji penetrates it. If it does, it may show that the price could breakthrough or rebound. You can then look for the close of the next session to get an understanding.
- – You could also watch for the long-legged doji to show up near the support and resistance regions. For instance, if the price rises and forms a long-legged doji close to a resistance level, it means there are higher chances of the price seeing a slide if the price dips below the low of the doji pattern.
Key takeaways:
The long-legged doji candlestick pattern is seen as a tug of war between the bulls and the bears and is an indicator of indecision. It is seen to form when prices move way beyond and below the opening and closing prices of the day and eventually the closing price moves near or at the opening price. As a trader, you can use this pattern on its own or in combination with another doji candlestick pattern to see if there are any reversals in the trend that are prevailing. While on its own a doji is a neutral pattern, it needs to be assessed in the context of historical price to get an indication of what the market may do in the future.
