How to trade the long legged doji

 

The long-legged doji doesn’t come along very often, but when it does, it brings with it a stack of key information in a very neat package.

If you read it correctly, you can collect some neat profits off the back of it.

How to spot a long-legged doji

As we saw last week, a doji is a candlestick with a very small or non-existent body. This means that the open and close price of the period should be the same, or within a few points of each other.

To count as a long-legged doji, the wicks of the candle should be long. So, it’ll look something like this …

There aren’t any official guidelines for how long the wicks on a doji need to be to count as ‘long legged’, but for me, a long-legged doji needs to be a spike in volatility.

So, I’d want the ‘legs’ of a long-legged doji candle to make this candle significantly bigger than recent candlesticks. Take a look at the example below, where the price volatility on the doji candle isn’t any greater than the candles before it …

This candle may look ‘long legged’ at first glance, but we’re looking for a surge of volatility in the market.

Compare this to the doji candle below, which (including its wicks) is noticeably larger than the candles before it …

So, what’s going on here?

Just as with other dojis we’ve seen, the long-legged doji is about a battle within the market between the buyers and the sellers. But for the long-legged doji, this battle has been particularly fierce, covering a lot of ground, as the price has been pushed higher and lower.

This suggests significant volume at play, and tells us that the tips of the doji’s wicks are clear price lines for traders. After the tussle – buyers and sellers have ended up close to where they began.

The doji channel

What this means is that our long-legged doji gives us a channel, with support at its low, and resistance at its high …

What we have now is a channel – and we’re going to trade the breakout of this channel.

Because of the spike in volatility seen in the long-legged doji, we expect a surge of volatility when that channel is broken – and that’s exactly what we see in this case …

This isn’t a move that we should hang around waiting for, nor one we should expect a huge number of pips from. If we’re trading off a single candle, we can’t expect the markets to remember our ‘doji channel’ for long! Within the next four or five candles, we should see our surge out of the channel, and collect a quick profit.

Beware volatility

The long-legged doji profit is all about taking advantage of a surge in volatility … but volatility can be a double-edged sword to those of us looking for a quick profit.

If the scale of your doji is very large, it could mean that news or data is causing the price to move very quickly, so any order you set to buy at the top of the doji, and to sell at the bottom of the doji could suffer from slippage. Watch out for significant market-moving events which cause VERY long-legged dojis in wild market conditions – these are best sat out of.

Also, be aware that volatility comes in fits and starts – the surge in volatility you see in the long-legged doji could taper off in the next candle, and you could see the price consolidate for a few candles before it makes its move. As I said above, don’t wait too long. But also, don’t worry if the price takes a small breather before the breakout.

 

To enjoy more content and get it faster Follow @TradersBulletin