swing trading

Long-Legged Doji Candlestick - How It Works and How Traders Can Use It

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When it comes to the stock market, sometimes you might hear the term "long-legged doji candle" mentioned. It refers to a type of stock chart candlestick that is popular among active stock traders.

This article will explain what a long-legged doji candle is and how traders might be able to benefit from using it.

 

What Exactly Is a Long-Legged Doji Candle?

A long-legged doji candle is a type of price candlestick found on a stock chart.

Stock charts show how a stock's price has changed over time, and that price activity can be conveyed in different ways. One of those ways is with price candlesticks, or price candles, which are also sometimes referred to as price bars.

Each price candle represents a pre-specified period of time, such as one day or one hour. Candles give information that might be pertinent to an investor, including the open price, close price, high price, and low price of the period.

A doji candle is a special type of price candle where the open price and close price are the same (or very close to it).

A long-legged doji candle is a type of doji candle where the open and close prices are roughly halfway between the high and low prices.

 

 

That image is a graphical icon that gives an idea visually of what a long-legged doji candle looks like.

You can see that the body of the candle, whose height represents the difference between the open price and close price, is almost nonexistent. That means the open price is roughly equal to the close price of that candle. That's what makes it a doji candle.

Also, this candle looks like a cross where the horizontal line is halfway between the high and low prices. That's what makes it specifically a long-legged type of doji candle.

 

What Does a Long-Legged Doji Candle Look Like On A Stock Chart?

The image below is an example of a long-legged doji candle as shown on one of our stock charts.

 

 

The long-legged doji candle is the gray one at the very far right of the stock chart, above the date of March 21.

The body of the candle is just a horizontal line with no height, and the horizontal line is halfway between the high and low. Those are the telltale signs that it's a long-legged doji candle.

Long-legged doji candles come in a variety of sizes. That particular one is relatively tall, and the open and close prices occurred almost exactly halfway between the high and low prices of the day.

 

How Do Traders Use a Long-Legged Doji Candle?

A long-legged doji candle is often seen as a sign of indecision in the market. It indicates that during that particular time period, the buyers and sellers were in relative equilibrium, with neither side able to exert significant control over the price.

The significance of a long-legged doji candle may depend on the context in which it appears. Many traders regard it as a potential reversal chart pattern.

A candlestick reversal pattern refers to a formation that may signal a change in the current trend of an asset's price. For example, a downtrend might see seller strength begin to weaken once a long-legged doji candle appears, and in turn might present an opportunity to buy.

 

Is a Long-Legged Doji Candle Bullish or Bearish?

A long-legged doji itself is neither bullish nor bearish. It can be an indication that the current trend may be reversing, though.

The direction of the current trend is what is potentially reversed. So, for example, if the stock has been going down prior to the long-legged doji candle, then the appearance of a long-legged doji suggests the stock might start going up. A trader could try to capitalize by going long (meaning that they would be buying instead of shorting).

If, on the other hand, the stock has been in an uptrend, and then a long-legged doji candle appears, it could be considered a signal that the stock might start going down. A trader could try to capitalize by shorting the stock or buying put options.

 

How Do You Find Stocks That Have Long-Legged Doji Candlesticks?

You can find them by using our Long-Legged Doji Candle scanner. It's a free tool we offer here at Stock Market Guides. It uses our proprietary scanning technology to find stocks that just had a long-legged doji candlestick on a daily chart.

Here's how the scanner results look:

 

That tool ensures that you don't have to waste time flipping through stock charts manually to find stocks with a long-legged doji candle.

 

Example of a Long-Legged Doji Candle Trading Strategy

For this example of a long-legged doji candle trading strategy, we're going to use a daily chart, where each price candle represents one day of price activity. That means it would be a swing trading strategy where the trade is designed to last more than one day but not for the long haul.

 

Entry for the Long-Legged Doji Candle Trading Strategy

The entry for this Long-Legged Doji Candle trading strategy will be as follows:

The entry criterion for our Long-Legged Doji Candle trading strategy is very simple.

Exit for the Long-Legged Doji Candle Trading Strategy

There are a lot of possibilities here for the exit.

For any given trading strategy, it can be helpful to define three different criteria for the exit: profit target, stop loss, and time limit.

Not everyone uses all three, and that's totally fine. Ultimately, you can set these values however you want. But for the purposes of this strategy example, we will define all three:

 

1. Profit Target

We will set the profit target at 2 ATRs away from the entry price.

ATR is an indicator in the stock market that measures a stock's recent price volatility. Most trading platforms have it available as an indicator you can enable.

Our profit target criterion indicates that we will take the ATR value of the stock, multiply it by 2, and add it to the price we paid when we bought the stock. That will be our profit target, and we can set up a sell limit order at that price.

2. Stop Loss

We will set the stop loss at 1.5 ATRs below the entry price. This means we take the ATR value of the stock, multiply it by 1.5, and subtract it from the price we paid to buy the stock.

That will be our stop loss, and we can set up a stop order at that price.

3. Time Limit

We will set the time limit as one week since this is a swing trade. If the stock has not hit either the profit target or stop loss by the time limit, then we will close the trade manually at the opening bell seven calendar days after entry.

 

How Well Do Long-Legged Doji Candles Actually Work?

The idea of a long-legged doji candle trading strategy sounds nice to many people because it offers a clear, easy-to-understand way to find a trade setup.

But does it actually work? Can traders indeed generate profits by trading long-legged doji candles?

That's exactly what our company can help answer for you, since our scanner technology has allowed us to do our own research on that precise question.

The answer is that trades based on a long-legged doji candle are not always profitable, but for certain stocks they might indeed have a track record of success according to our backtest research.

Here is some data that shows how a proprietary long-legged doji candle trading strategy we created has performed historically according to backtests:

 

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Anyone who signs up for our swing trading scanner service will be able to see stocks that qualify for that trading strategy in real time.

 

Learning More About Long-Legged Doji Candles

You can contact us any time if you would like to ask any questions about long-legged doji candlesticks or anything else related to the stock market.