Dragonfly Doji: How to Spot and Trade Candlestick Patterns

On a daily bar, why does the price only reverse enough to reach the daily opening level? Likely, it is because investors are neutral, no longer believing in the downtrend that prevailed in the early trading hours but also not sure the security has any real upward potential. The size of the dragonfly coupled with the size of the confirmation candle can sometimes mean the entry point for a trade dragonfly doji is a long way from the stop loss location. This means traders will need to find another location for the stop loss, or they may need to forgo the trade since too large of a stop loss may not justify the potential reward of the trade. Doji has a lot of variations, for example, gravestone, long-legged doji, dragonfly, doji following a long bullish candlestick, etc., which could be confusing.

We explain everything from dragonfly Doji’s meaning and interpretation to the ways of implementing this indicator in your trades. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74%-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money.

Trading Scenario for Dragonfly Doji

Although they are uncommon, when they are confirmed, they can provide a valid bullish trend reversal indicator. It’s a unique chart pattern and demonstrates a significant swing in momentum to the upside which is perfect for swing trading. This information can be golden if you are a swing trader, or looking to exit a position. Let’s look at an example of a doji dragonfly with a support level. Investopedia does not provide tax, investment, or financial services and advice.

The price wasn’t dropping aggressively coming into the dragonfly, but the price still dropped and then was pushed back higher, confirming the price was likely to continue higher. Looking at the overall context, the dragonfly pattern and the confirmation candle signaled that the short-term correction was over and the uptrend was resuming. In general, the neutral doji and the spinning top indicate uncertainty in the market, which is confirmed by their wicks (shadows).

How Do Traders Interpret a Dragonfly Doji Pattern?

You can try and practice your knowledge on the LiteFinance free demo account without registration. Let me explain trading the doji chart on the example of the USD/CHF H4 timeframe. A doji Japanese candlestick is a formation that appears in the candlestick chart when the price movement has stopped, and there is market uncertainty.

In the second example, a bearish dragonfly doji candlestick on a daily timeframe formed below support line and couldn’t cause the price to retraces. As we mentioned before, Dragonfly doji candlestick is rare on charts. In the first example, a bullish dragonfly doji candle on a daily timeframe showed a temporary price retracement then price continued to go down. The dragonfly doji is a Japanese candlestick pattern that acts as an indication of investor indecision and a possible trend reversal. The dragonfly doji works best when used in conjunction with other technical indicators, especially since the candlestick pattern can be a sign of indecision as well as an outright reversal pattern. A dragonfly doji with high volume is generally more reliable than a relatively low volume one.

What Does the Dragonfly Doji Look Like?

In the middle of the session, the buyers (bulls) regain control over the buyers (bears) and manage to bring the price up to the level of the opening quotation. The bearish version of the Dragonfly Doji is the Gravestone Doji. It looks like an upside-down version of the Dragonfly and it can signal a possible downtrend. In Chart 2 above of the mini-Dow, the market began the day testing to find where demand would enter the market, found support for the low price, but indicated a possible transition to an uptrend. The Dragonfly should be verified by waiting for trend confirmation on the following day.

However, the buyers were unable to create a new session high, hence why it is considered weak. The result is that the open, high, and close are all the same (or about the same) price.

Strategy 6: Trading The Dragonfly Doji With Pivot Points

Other techniques, such as other candlestick patterns, indicators, or strategies are required in order to exit the trade when and if profitable. After that, there is a short upward correction and the price draws another doji candlestick and a spinning top. Next, there is a clear red (bearish) candlestick, confirming a signal to enter a sell trade. Therefore, when trading this pattern, it is necessary to confirm the signal using other candlestick patterns or technical indicators.

It is repeated quite often on financial charts, so it is possible to see a trading signal and an investment opportunity. Conversely, when the market has shown an upward trend before, a dragonfly doji might signal a price drop, known as a bearish dragonfly. The downward movement of the next candlestick will provide confirmation. A gravestone doji occurs when the low, open, and close prices are the same, and the candle has a long upper shadow. The gravestone looks like an upside-down “T.” The implications for the gravestone are the same as the dragonfly.

Lawrence Pines is a Princeton University graduate with more than 25 years of experience as an equity and foreign exchange options trader for multinational banks and proprietary trading groups. Mr. Pines has traded on the NYSE, CBOE and Pacific Stock Exchange. In 2011, Mr. Pines started his own consulting firm through which he advises law firms and investment professionals on issues related to trading, and derivatives. Lawrence has served as an expert witness in a number of high profile trials in US Federal and international courts.

But if you spot a Doji in a strong trending market, it could be a sign of waning momentum and a possible reversal imminent. However, like all Doji, the Dragon Doji reflects some form of market indecision or hesitation. Thus, despite confirmation signals, the price may continue in the direction of the trend. In an uptrend, the confirmation candlestick should be a bearish candle closing below the Doji Dragon low. When the confirmation candlestick is bullish, it suggests more of a continuation or a break in the trend. In a bear market, the action of buyers (bulls) implies that a portion of investors exits short positions.