Introduction:
If you are new to stock market trading, you must learn to conduct technical analysis of stocks and make well-informed trading decisions. Not doing so can lead to huge potential losses and might even discourage you from trading further in the stock markets. One of the most crucial tools to help you in this aspect is the candlestick patterns.
What are candlestick patterns?
Rice traders initially developed the candlestick patterns in the eighteenth century in Japan. Over time, they evolved into one of the most extensively utilised tools by stock market traders to analyse and forecast price movements. These patterns are depicted on candlestick charts, visually representing price changes and providing valuable insights into market sentiments.
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You can interpret various candlestick patterns to understand potential signals for trend reversals and continuations. Each candlestick has three distinct elements – the body, wick, and colour. The body signifies the range between the stock’s opening and closing prices within a specific trading period, and it can be red or green (or black and white in some instances). A red (or black) body denotes a bearish stock movement, while a green (or white) body suggests a bullish stock movement.
The wicks, or shadows, are the slender lines extending above and below the body, indicating the stock's highest and lowest price points during the trading period. Accurately interpreting various candlestick patterns can provide valuable insights into prevailing market sentiments, empowering you to make well-informed decisions.
What is a long-legged doji pattern?
The long-legged doji is one of the most common candlestick patterns. This single-candle pattern occurs when the stock’s opening and closing prices are almost equal during a given trading period. The long-legged doji can be characterized by a very small or non-existent body but long upper and lower wicks or shadows.
The appearance of a long-legged doji indicates significant price volatility in the stock throughout the trading period, however, the opening and closing prices are still together. It suggests a continuous struggle between the buying and selling forces, resulting in an indecisive market. It may also indicate that a potential trend reversal may be around the corner as the stock’s price is no longer moving in the direction it was before the occurrence of the long-legged doji pattern.
Key characteristics of a long-legged doji
Below are the key characteristics that can help you identify the long-legged doji pattern in a candlestick chart:
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Small or non-existent body
As mentioned, a long-legged doji typically has a very small or non-existent body, indicating that the stock’s opening and closing prices are very close to each other.
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Long upper and lower shadows
Another distinctive feature of a long-legged doji is its long upper and lower wicks or shadows, representing the high difference between the highest and the lowest price points the stock reached during a trading session. It also reflects high volatility in a stock.
The colour of the body is not crucial in the long-legged doji pattern. Firstly, it has a negligible body, and secondly, it can form during both bearish and bullish markets.
Trading strategies for long-legged doji
Below are a few trading strategies for the long-legged doji pattern you can consider:
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A signal for trend reversal
The appearance of a long-legged doji is usually an indicator of the potential trend reversal. It can appear during both bearish or bullish markets and suggests high volatility in a stock. However, it’s better to avoid entering a trading position when you see a long-legged doji. It’s because it largely indicates uncertain markets, with neither bulls nor bears having a clear advantage.
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Confirmation from other technical indicators
You can confirm with other technical indicators or wait for the formation of a different candlestick pattern when you see a long-legged doji. For example, an increase in volume accompanying the long-legged doji strengthens its signaling power, indicating that market participants are actively reevaluating their trading positions.
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Adequate risk management measures
Like any other chart pattern, you must take adequate risk management measures to mitigate risks while trading with the long-legged doji. For example, you can adopt a comprehensive trading strategy with a stop loss and target.
To conclude
The long-legged doji pattern indicates uncertainty in the market. As a trader, you must confirm your trading decisions with other technical indicators or wait to form a new pattern. Make sure to exercise caution and implement risk management strategies.
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