Learning to Interpret Dragonfly Doji
Doji candlesticks are significant formations that are indicative of different market conditions. While Doji is famously associated with market indecisions, some Doji formations are more direct and indicate a trend reversal. Dragonfly Doji is one such pattern. By appearance, it is quite similar to Gravestone Doji, but there are subtle differences between the two, which we will eventually discuss in the article.
Characteristics Of A Doji
- Doji candlesticks have a small or no-real body with shadows because the opening and closing prices are often same
- It can take many forms like the one in discussion
- Often Doji forms are associated with market indecision before a trend reversal. in such situations, both bullish and bearish pulls have similar strengths
- Doji is direction neutral, and traders need to interpret it carefully to form their decisions
- Not all Dojis reflect market indecision. Some indicate trend reversals, but it needs to be confirmed by candle patterns forming after the Doji
Dragonfly Doji is a candle pattern with no real body and a long downward shadow, which is typical to it. It indicates price reversal, where open and close prices are the same or almost the same.
It is an indication that bearish trends have been strong and fished for the bottom and found it. There is a price support level and also a reversal buying trend which has pushed the price back up to remain close to the opening price.
Where does it appear? A Dragonfly Doji candlestick can appear during an uptrend or a downtrend indicating price movement either up or down.
When it appears in a downtrend, a Dragonfly Doji suggests aggressive selling but also strong buying force to bring the closing price up to the opening price. Conversely, a dragonfly appearing during an uptrend is indicative of possible downward price reversal. But price direction from a dragonfly pattern needs to be confirmed by the following candlestick patterns emerging in the chart.
- Dragonfly Doji can appear both in uptrend and downtrend, while the bearish version is called, Gravestone Doji
- The open, high, and close are same with a long downward wick formed by aggressive selling
- It indicates possible price alteration which needs confirmation from following candles that form. If the price fall or rise in the following candle then the trend is confirmed
- Candlestick traders wait for confirmation candles before acting on Dragonfly Doji
- It helps traders visually see where the support level is
- Other charts or indicators should be used in conjunction to confirm
- Dragonfly Doji, whether it is appearing during uptrend or downtrend, has different meanings
What Do Dragonfly Doji Patterns Tell You?
Dragonfly Dojis appear rarely. But when they do, they carry warning for a possible price change. A dragonfly emerging during an uptrend, with a long downward wick, foretells investors that bearish trend may be gaining strength and the uptrend may reverse. Investors always wait for the next candle to form after the Doji to confirm the trend. For bearish dragonfly, the next candle must drop and close below the Dragonfly Doji’s closing price. So, the candle appearing next to the dragonfly is an essential component of a chart. Dragonfly Doji confirms the presence of sellers early in the market, but the downtrend gets invalidated by strong buying pulls, resulting in same open, high, and closing price.
In the case of a bullish dragonfly, the next candle must close above the closing of the Dragonfly. The longer the body of the candle, the more reliable is the indication of a trend reversal.
How to take position during Dragonfly
A question may arise, why the price reversed to reach to its opening by day end? It is because the investors were neutral. They couldn’t confirm that the downtrend at the early trading hours will continue but also couldn’t prove that the stock has any upward potential.
Investors looking for possible entry in the market it becomes crucial to confirm the trend. Most traders enter the market during the formation of the second candle or shortly after its completion.
Applying a stop-loss policy while planning a trading strategy around Dragonfly Doji can help you beat the odds. If entering a long position in bullish reversal, use stop-loss below the lowest point of dragonfly’s wick, on the reverse, place stop-loss above the high end of dragonfly while taking a short position in bearish reversal.
Dragonfly vs Gravestone
A Dragonfly Doji is similar in appearance to the gravestone, where low, open, and close prices are the same. Gravestone Doji looks like an upturned T with a long upper wick. It also indicates a trend reversal, which needs to be confirmed by the candle appearing after it.
Dragonfly Doji patterns are rare, and therefore, not reliable. Together the dragonfly and the size of the next candlestick may indicate a long position from stop-loss. It means, traders need to find another stop loss or forego the trade, since too long stop-loss may negate the rewards from the deal.