Last Updated on 21 September, 2020 by Samuelsson
The candlestick chart has become one of the most popular ways of charting price. With their colorful bodies and black wicks, they make it easy to see where the market has been, and how it has behaved. One popular candlestick is the long legged doji pattern
A long-legged doji is a one candle pattern that signals uncertainty in the market, or an imminent reversal of the current trend. As to its appearance, a long-legged doji has a long wick both to the upside and downside, and a tiny or non-existing body that’s located in the middle of the candle’s range.
In this article, we’re going to have a closer look at the long-legged doji. We’ll cover its meaning, definition, how to improve the pattern, and we’ll also show you a couple of example trading strategies.
Long Legged Doji Definition
For a candle to be called a long-legged doji, it must meet the following criteria:
- The body should be tiny, or absent, meaning that the candle opens and closes at or around the same price
- The close and open should be located in the middle of the candle’s range.
- The wicks are of significant size.
The last point is important to remember, since a long-legged doji with small wicks, in effect becomes a neutral doji. We’ll have a look at the different doji types and make a comparison between them later in the article!
What Does a Long-legged Doji Mean?
As we covered in the introduction, the traditional interpretation of a long-legged doji, is that it’s a reversal pattern.
Now, depending on the trend direction of the market action leading up to the long-legged doji, it will be a bullish or bearish reversal pattern.
A long-legged doji after a bullish move is considered a bearish reversal pattern.
Conversely, a long-legged Doji after a bearish move is considered a bullish reversal pattern.
What Does a Long-legged Doji Tell us About the Market?
Every candlestick pattern tells a unique story about the market action, that could be used to forecast the coming price movements to some extent.
Let’s have a look at the meaning of a long-legged doji that appears after a bullish move, just to get an idea of what market action that lies behind the pattern.
The market advances, and since it’s in a bullish trend, the prevailing market sentiment is bullish. Most market participants expect prices to rise, and are positive.
When the market opens for the new day, everything seems normal at first. Buying pressure is stronger than selling pressure, and makes the market head higher. However, with the market having gone up for quite some time, market participants are becoming worried that a pullback or trend reversal is imminent. As such, they start selling their positions, which increases selling pressure, leading to a decline in price.
Sellers manage to push the market below the open, and further down. However, a new wave of buyers who believe the market is oversold due to the price decline, enters the scene, and manages to push the close back to the opening level.
The long-legged doji is a candlestick pattern that tells us that the market has reached a point where there is an equilibrium between buying and selling pressure. As such, occurring after a trend, it’s an indication that the market no longer possesses the power needed to continue in the same direction.
Long-Legged Doji Examples
Here follow a couple of examples of the long-legged doji:
Long Legged Doji VS Other Types of Doji Patterns
The long-legged doji is part of a family of candlesticks, called “dojis”. As such, you might be interested in knowing which ones the other are:
The neutral doji is nearly identical to the long-legged doji. The only difference is that it’s a smaller pattern. Thus it’s a less powerful pattern than the long-legged doji.
Here you may read more about the neutral doji.
The gravestone doji is slightly different from the long-legged doji. It has a long upper wick, a small or absent body, and no lower wick.
As to its meaning, it’s only a bearish reversal sign, which is quite apparent given its name
Here is our article on the gravestone doji pattern
The dragonfly doji basically is an inverted gravestone doji. It has a long lower wick, a small or absent body, and no upper wick.
However, in contrast to the gravestone doji, and as with a long-legged doji, a dragonfly doji can be either a bearish or bullish pattern.
Here you may read more about the dragonfly doji.
Improving the Long-Legged Doji for Real Trading
Most real traders would agree if we told them that you cannot use the long-legged doji as is. It simply won’t be profitable if you use it straight away.
Instead, you will have to add filters and additional conditions to improve the accuracy enough for it to be worth your time.
In this section of the article, we wanted to share some good ways you can go about to filter out bad trades. These are methods that we use a lot in our own trading strategies, and that have proven themselves many times over.
However, choosing the right filter isn’t going to make you profitable, if you don’t use the right timeframe and trading strategy. We recommend that you use backtesting to ascertain where the particular filter you choose works best.
1.Oversold and Overbought Conditions
As said, the long-legged doji signals a reversal of the trend. Following this, we should definitely look into different ways of defining when a market is oversold or overbought, to better know if a long-legged doji is worth acting on, or not.
One of our favorite ways of measuring whether a market is overbought or oversold, is with the RSI indicator. When the RSI shows high readings, then the market is overbought, and when it shows low readings, it’s oversold.
Since the RSI outputs readings from 0-100, you not only get a sense of whether the market is overbought or oversold, but also how oversold or overbought it is.
Using this information, we could decide to take long trades if RSI is above 80, and go short when it’s below 20, just to name one example.
Apart from using RSI, there are several methods you could employ. Here are two more examples, that we sometimes use in our own trading:
- Count the number of positive or negative candles. Many positive candles indicate an overbought market, and vice versa.
- See whether the market is above or below its moving average.
Volatility could have a huge impact on the performance of patterns like the long-legged doji. In some markets, you will find that the pattern works much better with high volatility than low volatility, while the opposite will hold true in other markets.
In the strategy examples covered soon, we’re going to share how you could use Bollinger bands to measure the volatility level of a market. However, as for now, we’d like to recommend the following approaches:
- Use the Average True range indicator to measure the average ranges of the bars.
- Use ADX, which is one of our favorite trading indicators to measure volatility. Readings above 20 signals high volatility, and vice versa.
3. Seasonality and time
In many markets, all days aren’t equally bullish or bearish. In fact, there could be a significant difference in performance for a long-legged doji based on which day of the week it is.
Seasonal tendencies aren’t only found on the day level, but also on the monthly, weekly, or hourly level. For example, if trading intraday charts, your strategy might work better in the first half of the day, than the second.
Analyzing the time element could lead to some quite interesting insights. Just to name a few, we have some strategies that actually work by having short entries only happen on odd dates, and long on even dates.
Just to give an example, you may find that Wednesdays are extra bullish in your chosen market. Then, if you spot a long-legged doji coming from a bullish trend, you might want to take the signal more seriously. As a matter of fact, it has managed to challenge the bullish sentiment of that day, which, in theory, makes it more significant.
Long-legged Doji Trading Strategies
Having covered how to improve a long-legged doji, we wanted to show you how we would go about to create a trading strategy. We’re going to show you 2 different example trading strategies, from which we hope you draw inspiration for your own testing!
Being example strategies, it means that they’re not meant for live trading. And while the concepts shown aren’t tradable right away, it shows how we would go about if we were given the long-legged doji to work with as the foundation for a strategy!
1 Long-legged Doji With Bollinger bands and Volatility Filter
As you probably remember, we wanted the market to be in a positive trend to short a long-legged doji, and in a negative trend to go long. Now, in this strategy, we’ll use the Bollinger bands to help us with this!
The Bollinger band indicator is a very useful trading indicator that consists of a number of bands. In short, it has a lower, upper and middle band, where the lower and upper bands are placed two standard deviations away from the middle band, which is a moving average.
Now, this means that when the market is in an uptrend, it’s going to be above the upper band, and below the lower band when it’s in a downtrend. As such, we’d like to go long on long-legged dojis below the lower band, and the other way around. That’s how we use it in this strategy.
In addition to the above filter, we’ll also make use of the Bollinger bands indicator to measure volatility in the market. By dividing the upper Bollinger band by the lower band, we get a ratio, which naturally is often referred to as Bollinger bandwidth. Since the bands adapt to the current volatility level, they will be further apart in a volatile setting, and closer to each other when the market is calm.
Thus, the higher the ratio we get, the more volatile is the market.
We want to enter when the distance between the bands is quite big, so we’ll require a ratio of more than 1.1.
The rules for the strategy become:
Go long if:
- The ratio between the upper and lower band is higher than 1.1.
- The close is below the lower band
- We have a long-legged doji
Go short if:
- The ratio between the upper and lower band is higher than 1.1.
- The close is above the upper band.
- We have a long-legged doji.
Then we’ll exit a trade after 5-bars.
Trading Strategy 2: Long-legged Doji With Volatility Filter
One great way of gauging the significance of a pattern is to watch the volume. If the volume is high, it means that many contracts or shares were traded when the pattern formed, which, in theory, makes a reversal pattern more accurate.
That’s why this example strategy will make use of volume, in the way that we require it to be at least two times higher than the volume of the previous bar.
Thus, our rules to go long become:
- We have a long-legged Doji
- The volume of this bar is at least twice the size of the previous bar’s volume.
- To ensure that the market has gone down before we act on a signal, we demand that the close is lower than the close 5 bars ago.
Then we exit the trade 5 days later.
In this article, we’ve had a look at the long-legged doji pattern, its meaning and how to improve it. In addition to that, we’ve also provided two example strategies, that hopefully will help you come up with ideas for your own strategies.
Before ending, we just wanted to share some important advice. DO NOT TRADE ANYTHING YOU HAVEN’T TESTED yourself. The internet is littered with trading advice that doesn’t work, and to separate the wheat from the chaff, you will have to carry out your own analysis.