A Dragonfly candlestick pattern is one of the top four Doji patterns and is easy to identify on a price chart. It can signal a reversal to the upside or downside, depending on the previous price trend. Candlestick patterns are a great form of technical analysis. The bars, or candles, on a stock chart can tell a story about what is going on in the market atmosphere and possibly future price direction.
The market can only go up, down, and sideways. Candlestick patterns illustrate the price action and can create a picture to help us anticipate market direction.
While candlestick patterns have proven to be useful, their reliability requires additional confirmation using next candle language and other technical indicators or trading strategies.
“Doji” in Japanese means mistake or error. In the trading world, it translates into indecision. When you see one of the top four Doji candlestick patterns, you can identify that the stock market has encountered indecisiveness and that a possible reversal may develop, or some correction and continuation is to follow.
What Does the Dragonfly Doji Candlestick Look Like?
The Dragonfly Doji pattern is a form of technical analysis. It is also referred to as the “T” due to its appearance or shape.
The Dragonfly Doji will have a long lower shadow or wick.
It will have a very small or completely absent upper shadow or wick.
The opening price and closing price of the candle are the same price or nearly identical and near the high.
These candlestick attributes are important and identify the Dragonfly Doji. If these attributes are not met, the candlestick pattern can be invalid and also confused with other candlestick patterns such as the hanging man, hammer, or Takuri line candlestick pattern.
What Does the Dragonfly Doji Candlestick Mean?
The Dragonfly Doji can be a price reversal signal when the pattern occurs. It is a one candle reversal pattern that doesn’t appear frequently but can hint at a shift in the current trend. It can also appear after a brief pullback in trend and signal a continuation pattern.
After an uptrend in price movement, the Dragonfly Doji’s long lower shadow suggests that the price may be on its descent down due to selling pressure being present and that the bullish move may be over. Because the candle’s closing price closes near or at the opening price, we can detect that the previous upward bullish attempt to push the price higher than the open has been affected by the bearish participation. The asset may then see a price decline.
A Dragonfly Doji may be present at the bottom of a downtrend as well. The long lower shadow suggests that the bears are attempting to push the price lower, however the closing price of the candle meeting the open price suggests that the buying pressure is present. This could signal a turn in the asset price and suggest a future upward trend.
The new trend is considered more significant and confirmed by the higher volume contained in the Dragonfly Doji candlestick and the next candle that appears. The Dragonfly candle must have good volume and the candle after a Dragonfly Doji must confirm the new direction of the change in price movement, otherwise, it could be a weak signal or invalid.
Most traders use other technical indicators to also confirm the stock price shift. Using other forms of technical indicators is a good way to obtain confluence and ensure the validity of the Dragonfly Doji pattern.
Is the Dragonfly Doji Candlestick Pattern Reliable?
While it is easy to spot a Dragonfly Doji, it should not be used on its own accord to open trade positions. Like all candlestick patterns, they should be confirmed by other methods.
Volume needs to exist in the Dragonfly Doji. High volume tells traders that market participation is present and that the information contained in the candlestick is more valid. Low volume could be evidence of a false or weak signal.
The second indicator that traders may look for is the appearance of the following candles. Does the preceding bar confirm the new price movement? The Dragonfly Doji can appear after an uptrend or downtrend, so seeing the next candle confirm the new shift in price action provides key support.
Traders also use other indicators that track overbought or oversold conditions, such as Bollinger Bands or RSI, the relative strength index. Another technical indicator that is used to look at trend momentum and possible trend reversals is the MACD or the moving average convergence divergence.
Combining the Dragonfly Doji candlestick with other methods will prove its significance and confirm its validity. Whether it be the use of technical indicators with breaks of support and resistance or retests of supply and demand zones, combining the pattern with strategy is a necessary risk management tool.
It is important to also note that Dragonfly Doji patterns have less importance in non-trending markets. If the market has no clear trend, meaning it is not clearly breaking highs or lows, you will see the movement as sideways with price moving within set ranges or consolidating. This means that if the market is ranging, the significance of the Dragonfly Doji will be less reliable when it occurs in that kind of price squeeze.
How to Trade the Dragonfly Doji Candlestick Pattern
After a trader has confirmed the validity of the Dragonfly Doji pattern, they can then decide how to react to a current trade position or how to enter a new trade position given the trend reversal.
The following information is meant to be suggestions based on the confirmed validity of the Dragonfly Doji pattern and should be tested before live trade use.
If the Dragonfly Doji is valid and appears after an uptrend, a trader can decide to exit a bullish position they may have already opened. When a trader projects the price of a stock to increase, they create long positions or options call trade positions. If the Dragonfly Doji appears and its information is valid, for intraday or short-term traders, it may be in their best interest to get out of their current long positions with profit since the price is projected to go down.
If a Dragonfly Doji is valid after an uptrend, a trader can also see the candle’s information as an opportunity to open a new trade position taking advantage of the new downside. Once the trend reversal is confirmed and going down, a trader can consider taking a bearish trade entry. This means exercising short positions or an option put, projecting price will proceed in a downtrend.
All of this applies if the Dragonfly Doji appears following a downtrend as well, however, opposite trend/trade positions would apply.
Entering these trade positions should be executed with the confirmation of volume, proceeding candle price action that agrees, a combination of other technical indicators, and the use of trading strategies. The Dragonfly Doji should not be confirmation enough to enter a trade.
Summary: Dragonfly Candlestick Pattern
The Dragonfly Doji candlestick is typically a reversal pattern. When a bullish trend or bearish trend has lost momentum, and the price of the stock no longer can be pushed to a new high or low, the agreement in the opening and closing prices near the high of the Dragonfly Doji shows a potential trend reversal.
Although it presents a potential trigger to implement a trade, it is important to confirm the Dragonfly Doji candle’s information by looking at volume. The following candles and their structure, and other technical indicators before taking that risk.
The opposite candlestick pattern to the Dragonfly Doji is the Gravestone Doji. Same concept but inverted in shape and is primarily a bearish reversal pattern.
Like all candlestick patterns, it is useful to test them on the asset you trade with, using your personal trading strategies to base effectiveness and provide a form of risk management. It is also helpful to experiment using them on various time frames to gauge reliability.
Resources to Check Out
- Top 4 Doji Candlestick Patterns
- Hammer vs. Hanging Man Candlestick Pattern
- 3 Keys to MACD Day Trading Strategy
- How to Use Bollinger Bands in Day Trading
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