Long-legged doji
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Long-legged doji in technical analysis is a candlestick pattern in which opening and closing prices differ slightly (almost the same), but both shadows are long [1]. Long-legged doji indicates indecision about the future direction of the security.
The structure of the candle
The candlestick chart usually consists of two types of candlesticks: bullish and bearish. The bullish candle consists of[2]:
- maximum
- top shadow
- closing price
- body
- opening price
- lower shadow
- minimum
When the close price is below the open price, the candle is bearish. The difference between the open and close price is the body of the candle, which for convenience is displayed in different colors for bear and bullish candles[3].
Doji's opening price is equal to or almost equal to the closing price[4].
The length of the shadow
The upper and lower shadow of the candlestick gives the analyst valuable information about the trading session[5]:
- Short upper and lower shadow suggests that most transactions were concluded at a price range between the opening price and the closing.
- Long shadows, on the contrary, indicate that trading activity took place outside the range between the open and close prices.
Characteristics of long-legged doji
A long-legged doji is formed when the opening and closing prices of a candle are equal to or nearly equal, despite a significant price movement throughout the trading day[6]. This model signals indecision about the future direction of the trend[7]. Long-legged doji are considered the most significant when they occur during a strong uptrend or downtrend. Such doji suggests that at the moment the market forces of supply and demand are approaching equilibrium and that a trend reversal may occur.
The difference between long-legged doji and the rickshaw man
A long-legged doji means that the candle has one or both shadows very long[8]. The rickshaw man has body just in the middle of the candle, while the condition of long shadows is not canceled.
The rickshaw man is formed when the bulls and bears are in control of the price of the selected timeframe to the same extent[9]. This creates a wide range of price movement over this period and therefore long shadows on the candle in both directions. Despite considerable volatility, there is no clear directional movement, and the price closes very close to the opening price, which creates a doji with a body in the middle.
Both candles are of great importance, especially if they appear on top. At the bottom of the trend, like any other doji, they are less important.
High wave
There is an exceptional candle that can also be considered one of these two, called "high wave". It is formed in the same way as a long-legged doji or the rickshaw man, but with the difference that it has a small distance between the opening and closing prices[10].
What distance from opening to closing can be considered acceptable? By the number of points, it is impossible to say, because it depends on the selected timeframe. The larger the time scale, the greater the price difference is allowed. You need to identify visually. As you know, "tops" are usually small in size, and their body looks like a square – this determines their height. Now, in a high wave, it's not a square, it's half or less.
Examples of Long-legged doji
- In a daily chart of Apple Inc., on August 18th, 2020, the long-legged doji was formed. On this day, the opening price of the stock was $462.8 and the closing price was $462.9, with both the upper and lower shadows reaching to $467.2 and $457.7 respectively. This long-legged doji indicates that the stock was traded within a narrow range and investors were indecisive about the future direction of the stock.
- In a daily chart of Amazon Inc., on October 20th, 2020, a long-legged doji was formed. On this day, the opening price of the stock was $3,222.3 and the closing price was $3,223.4, with both the upper and lower shadows reaching to $3,250.4 and $3,196.2 respectively. This long-legged doji indicates that the stock was traded within a narrow range and investors were indecisive about the future direction of the stock.
Advantages of Long-legged doji
A Long-legged doji is a candlestick pattern that suggests indecision about the future direction of the security. Some advantages of this pattern include:
- Providing insight into market sentiment: Long-legged doji suggests that the buying and selling pressure is evenly balanced, and that the market is uncertain about the future direction of the security.
- Indicating a possible reversal: Long-legged doji can indicate a potential reversal in the market trend.
- Giving traders an opportunity to take advantage: By identifying a Long-legged doji, traders may be able to take advantage of a potential reversal in the market trend.
- Providing an indication of price stability: Long-legged doji can indicate that the security is trading in a narrow range and that the price is relatively stable.
Limitations of Long-legged doji
A long-legged doji is a prominent candlestick pattern in technical analysis that signals indecision regarding the future direction of the security. Despite being a useful tool in assessing market sentiment, there are certain limitations to keep in mind when utilizing this pattern:
- It cannot be used to predict upcoming price movements. A long-legged doji does not necessarily indicate that a security will experience a reversal in direction or an upward or downward trend.
- It does not indicate how long the pattern will last. A long-legged doji could continue for a short period or a long period of time.
- It does not indicate the magnitude of the price movement. A long-legged doji does not give an indication as to whether the upward or downward movement will be large or small.
- It does not provide any insight into the overall trend of the security. A long-legged doji may only indicate that the current price is in a period of indecision, but it does not provide any indication of the overall trend of the security.
A Long-legged Doji is a candlestick pattern that indicates indecision in the markets, and as such, traders can use it as an indication of future direction. In addition to understanding the Long-legged Doji, there are a number of other approaches that traders can use to try to determine future price movements. These include:
- Technical indicators: Technical indicators such as moving averages, Bollinger Bands, and the Relative Strength Index can help traders determine support and resistance levels, as well as indicate potential trading opportunities.
- Fundamental analysis: Fundamental analysis is the process of evaluating a security based on economic, financial and company-specific factors. Fundamental analysis can help traders understand the underlying forces driving a security's price.
- Sentiment analysis: Sentiment analysis is the process of measuring the tone of a security's news coverage or social media conversations. This can help traders identify potential trading opportunities based on the emotions of the market.
- Price action trading: Price action trading involves using past price movements to identify potential trading opportunities. This can involve looking for specific chart patterns or visualizing the order flow of a security.
In summary, Long-legged Doji is one tool traders can use to try and determine future price movements. In addition, traders can also use technical indicators, fundamental analysis, sentiment analysis, and price action trading to gain insight into the markets.
Footnotes
References
- Edwards, R. D., Magee, J., & Bassetti, W. C. (2016)., Technical analysis of stock trends, Published by The International Federation of Technical Analysts
- Kole E. (2010)., How to Identify and Predict Bull and Bear Markets, Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam
- Marshall B. R., Young M. R., Rose L. C. (2006).,Candlestick technical trading strategies: Can they create value for investors?, Journal of Banking & Finance 30, 2303–2323
- Morris G. L. (2012).,Candlestick charting explained, Published by The McGraw-Hill
- Nison S. (1991)., Beyond Candlsticks. New Japanese Charting Techniques Reveale, Published by John Wilery & Sons
- Reversal Patterns (2019), Reversal Patterns
- Rockefeller B. (2011)., Technical Analysis For Dummies, Published by Wiley Publishing
- Technical Analysis (2019), Technical Analysis, Published by The PediaPress
- Think Market (2014).,Introduction to candlestick patterns. Learning to Read Basic Candlestick Patterns
Author: Anastasiia Ilnytska
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