You have probably heard or become interested in financial
markets at least once in your lifetime. When trading in financial markets like
Forex, we often use our knowledge of technical and fundamental analysis.
Sometimes we succeed, and other times things may not go as planned. To be more
successful, we need to gain a deeper understanding of the market's rules. So,
where should we start? you might ask. Learning about Japanese candlesticks can
be a good beginning, I believe. In technical analysis, there are various types
of single and combined candlesticks. One of them is known as the Long-Legged
Doji, a member of the doji candlesticks family. In this article, we will discuss
the noteworthy Long-Legged Doji among Japanese candlesticks.
Identifying the Long-Legged Doji
Long-legged Doji is a Doji candlestick that we use in graphic analysis when trading in all financial markets. Long-legged Doji, unlike other Doji types, has a long upper and lower shadow, showing that there is significant volatility in the intraday price movement. The body length is very short or nonexistent.
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| Long-legged Doji Candlestick |
Here are the basic features of Long-legged Doji:
- Short Body or 0 (zero) body length: The body length of the Long-legged Doji candlestick indicates that there is almost equal or very little difference between the opening and closing prices. In other words, it signifies that during the time period when this candlestick forms, the market experienced both upward and downward rallies, but it was unable to sustain in either rally, closing at the same level it opened. This situation may suggest uncertainty or instability in the market's intraday direction.
- Long Upper and Lower Shadows: The Long-legged Doji typically has long upper and lower shadows (wicks) that represent price movements during the day. The upper shadow shows the highest price of the day, while the lower shadow shows the lowest price. This situation can reflect a struggle or uncertainty between buyers and sellers. Prices have reached high and low levels during the day (or any given time frame), but by the end of the day (or time frame), they have closed near the opening level.
- Color: The minimal difference between the opening and closing prices of the Long-legged Doji candlestick reflects its color. If the closing price is slightly higher than the opening price, the Long-legged Doji appears as a green (blue) candlestick. Conversely, if the closing price occurs slightly below the opening price, the Long-legged Doji appears as a red candlestick. When the opening and closing prices are almost equal, the Long-legged Doji forms as a colorless or black candlestick. All of these represent a reflection of the battle between buyers and sellers in the market. As a result, uncertainty is still ongoing.
Interpretation and Trading Strategies of Long-legged Doji
This candlestick can be interpreted as both a Bearish Long-legged
Doji and a Bullish Long-legged Doji in financial markets. The bearish Long-legged
Doji tends to lead to a decrease in prices, while the bullish Long-legged Doji
leads to an increase in prices. The Long-legged Doji draws attention in the
market due to increased volatility, conflicts, and situations of uncertainty.
It stands out with the following three main possible interpretations and
suitable trading strategies:
Trend Change or Reversal Signal:
Long-legged Doji can be a sign that a trend is ending or
weakening. We can interpret this as a reversal signal in the market. Let's now
examine this with live examples. In the following 4-hour chart of Euro/USD, a
bearish long-legged doji formed at the end of the uptrend and the trend
reversed. In this case, we can enter a sell order, taking into account the
confirming candle stick. The stop-loss level is determined as the highest point
that the price has seen. If the bearish long-legged doji is seen near the
resistance level, this may be a more reliable sell signal.
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| Live Euro/USD Chart with Bearish Long-Legged Doji |
Another bullish long-legged doji candlestick seen in the
4-hour chart of Euro/USD caused a trend change, namely the start of the
uptrend. In this case, it would be more logical to give a buy order. An example
of this is given in the following picture. If the long-legged doji candle stick
appears near the support level, this may be a more reliable buy signal. The
stop-loss level is determined as the point slightly below the lowest point that
the price has seen (slightly below the support level).
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| Live Euro/USD Chart with Bullish Long-Legged Doji |
Continuation Formation:
Long-legged Doji can also be interpreted as a continuation
formation that shows that the current trend will continue. This is valid for
both downtrends and uptrends. A live example of this is illustrated in the
4-hour chart of EUR/USD:
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| Long-Legged Doji Trend Continuation Examples |
Technical Correction:
The Long-legged Doji can be interpreted as the beginning of
a technical correction. For example, if a Long-legged Doji forms during an
uptrend or downtrend, it may signal a correction before the trend continues.
Take a look at the live example in the 4-hour chart of the British Pound/US
Dollar:
Long-Legged Doji as a Technical Correction
Please keep in mind that the Forex market is a
volatile financial market with high returns as well as high risks. It is
important to be careful when trading in financial markets. Candlestick patterns
such as Long-legged Doji may not provide a reliable trading signal on their
own. They should always be used in conjunction with other technical analysis
tools and indicators, and fundamental analysis factors should also be
considered. Effective risk management, protection of investment capital,
development and implementation of a sustainable trading strategy before each
trade can increase our success rate.