Understanding the Dragonfly Doji Candlestick Pattern

This pattern appears at the end of the downtrend when the supply and demand factors are at equilibrium. This pattern is found at the end of the uptrend when supply and demand factors are equal. The buyers step in off these lows ($27.56) in the afternoon, reverse all the gains the sellers made earlier in the session and close the day back at $28.19.

  • Doji tend to look like a cross or plus sign and have small or nonexistent bodies.
  • Dragonfly Dojis tend to occur when the price of an asset experiences a sudden shift.
  • This guide will discuss the Doji candle, explain what it is and how it works.
  • Once this price momentum reaches a point of exhaustion, its final point of completion is usually expressed as a “flash” event to the downside.
  • When the trend favors the Doji candle, it always indicates a risk of harm.

Risk management for trading the Dragonfly doji pattern can be complex due to many factors. It is vital in a stock or crypto market to ensure profits do not get wiped out by losses. When trading the Dragonfly doji pattern, it is essential to look for confirmation of a trend reversal before opening a trade and placing a stop-loss order near local support/resistance levels. Dragonfly Dojis can be a reasonably decent bullish reversal pattern when it takes place.

Is Your Risk/Reward Enough?

Based on this shape, analysts are able to make assumptions about price behavior. The filled or hollow bar created by the candlestick pattern is called the body. A stock that closes higher than its opening will have a hollow candlestick. When combined with other confluence factors such as existing trend, support and resistance and volume spread analysis, the dragonfly doji pattern can be quite potent for traders. Thus, the dragonfly doji is not a highly reliable indicator of price reversals.

The long lower tail of a dragonfly doji indicates that large amounts of selling have flooded the market, which caused downward pressure on the security price during a certain period. However, at the end of that period, the close price is still able to stay at the level of the open price. It suggests that buyers in the market are able to absorb this much selling and pull back the price.

Dragonfly Doji Trading Strategies

Due to the identical opening and closing prices, it is classified as a doji candle. The Japanese name means not only “dragonfly”, but also a bamboo-copter or bamboo dragonfly (jap. taketombo, 竹蜻蛉), which is a toy helicopter rotor that flies up when its shaft is rapidly spun. Shimizu notes that the market after the appearance of the Dragonfly Doji may behave as unpredictably as the toy –- they both rise and fall. The green color of this doji suggests that it could be a bullish sign, potentially indicating an increase in prices shortly.

A Doji, on the other hand, would indicate a price drop, also known as a bearish dragonfly, if the market had previously shown signs of strength. The Dragonfly Doji pattern is a reliable indicator of a potential trend reversal. Moreover, traders should always use stop-loss orders to minimize potential losses. Every candlestick pattern has four sets of data that help to define its shape.

The future direction of the trend is uncertain as indicated by this Doji pattern. On the 21st of October 2014, Pfizer gaps up and trades back above the high of the dragonfly doji triggering https://1investing.in/ a long buy stop order. This pattern falls into the market reversal category and is part of the doji family. To know what markets and timeframes to trade you need to use backtesting.

The dragonfly doji forms when the asset’s high, open, and close prices are the same. It is often interpreted as a sign of a potential reversal in price, either to the upside or downside, depending on past price action. The dragonfly doji may appear at any point during a trend, leading to either a weak or strong signal.

Construction of the Dragonfly Doji Candlestick

The confirmation candle size can vary significantly, making the entry point for a trade far from the stop loss location. Finally, it is difficult to justify a business on a Dragonfly doji reversal pattern alone due to its low reliability. As a result, it is essential to consider other price reversal patterns when analyzing price movements.

What a Dragonfly Doji Indicates

A dragonfly doji candlestick forms when an asset’s open, close, and high are at the same price level. A dragonfly doji with high volume is generally more reliable than one which forms on relatively low volume. Ideally, the confirmation candle also has a strong price move and strong volume.

Dragonfly and Other Doji Types

The dragonfly doji is used to identify possible reversals and occurs when the open and closing print of a stock’s day range is nearly identical. Dragonfly dojis are very rare, because it is uncommon for the open, high, and close all to be exactly the same. The example below shows a dragonfly doji that occurred during a sideways correction within a longer-term uptrend.

In the case of a dragonfly doji, the opening, the high, and closing price are the same. Such a pattern can only occur when the market trades down and then reverses but does not move above the opening price. If the candlestick occurs right after the bullish dragonfly rises and closes at a higher price, the price reversal has been confirmed, and trading decisions can be made.

With no more sellers left in the market, buyers are able to enter at the beginning of the next uptrend. Ultimately, a strong price performance on the day that follows the Dragonfly pattern helps to confirm the reversal. In addition to the reliability concern, another limitation of the doji pattern is that it cannot provide price targets. It is difficult to estimate the return of a trade that is made according to pure dragonfly doji analysis. Traders need to use other technical indicators or patterns to identify the proper time for an exit.



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