If you want to learn about the dragonfly doji and how to trade it in one place, then you’ll love this guide.
We have identified the top 5 things that makes the dragonfly candlestick unique to trade.
After reading this article, you’ll have a deeper understanding of the powerful dragonfly doji patterns and how to identify them.
We’ve even made it easier for you by providing the section links below:
- What is a dragonfly doji?
- What does a dragonfly doji mean?
- How to trade a dragonfly doji
- Examples of a dragonfly doji
- Dragonfly doji pros vs. cons
Let’s get stuck in:
What is a Dragonfly Doji
A dragonfly doji pattern is formed when the buyers in the market have essentially managed to push the session’s candlestick from a session low back to the session’s open price.
(A session can be the price movement within a certain timeframe, e.g) 1-day, 1 hour, 15 minutes…)
Wikipedia defines the low wick as: “The long lower shadow suggests that the direction of the trend may be nearing a major turning point.“
The dragonfly doji pattern is confirmed when the high, open and close prices are equal, or very similar, whilst there is a long wick that has created a session low.
The longer the wick, the more significant the move can be.
Just think like this:
That the sellers managed to easily continue a trend lower to a certain point in the market.
Then, with the price being low, a large rush of buyers could have taken place and pushed the session’s price back up to it’s open.
This is significant because it shows that buyers are back in the market.
Which as a forex trader, will allow you to respond appropriately.
One of the most important aspects to remember when trading forex is to ensure that the candlestick pattern has been confirmed by the session close.
It is common in forex trading for beginners to see a dragonfly doji pattern in an open session and they trade what they see.
However, because the candlestick patterns are not confirmed they could be stopped out quickly – or trade in the wrong direction.
Tip #1: Never trade an open candlestick, make sure it has been confirmed by closing.
What does a dragonfly doji mean?
The dragonfly doji candlestick is a bullish trend reversal candlestick pattern that is part of the doji pattern family.
The significance of the dragonfly doji is that it doesn’t appear too often, in comparison to other candlestick patterns.
This can increase its validity as a trading indicator.
Dragonfly doji patterns can appear at any time during a trend.
However, it doesn’t always mean that the trend is guaranteed to change because of this dragonfly doji candlestick appearing.
That being said:
Naturally, dragonfly doji patterns form at the bottom of a downtrend or where the price has found support.
This can be an early signal that the bearish trend is showing weakness and that buyers are showing strength around that price level.
You must also consider time as a factor, and candlestick patterns on different time levels weaken or increase its signal strength.
For example, if you saw a dragonfly doji on a 1-day chart, that will provide a significantly stronger signal than a dragonfly doji appearing on a 1-minute chart.
Tip #2: The higher the timeframe session, the stronger the validity of the bullish signal.
How to trade Dragonfly Doji
To trade the dragonfly doji candlestick is very straight forward.
After a dragonfly doji candlestick has formed, it will alert you that a change in trend is potentially about to occur.
In order to trade this, you must treat it like trading any other candlestick chart pattern, which is to only trade the pattern around areas of confluence such as support and resistance levels, or:
- Reacting from the Support Level
- Reacting from the support of a moving average
- Reacting from the support of a lower Bollinger band
- Reacting from the support of a Fibonacci level
Note: Trading the dragonfly doji candlestick pattern alone can lead to poorer quality trades, whereas combining the pattern with a support level will make it a stronger signal.
Let’s look at an example of a dragonfly doji with a support level.
The dragonfly doji may appear at any point during a trend.
This can lead to two forms of signals:
- a weak signal
- a strong signal
This is based on where the patterns emerge.
Dragonfly Doji In an Uptrend
When a dragonfly doji is confirmed in an uptrend it is considered a weak signal, or a continuation pattern as the buyers still managed to be active.
However, the buyers were unable to create a new session high, hence why it is considered weak.
That being said, as a continuation pattern, it shows that buyers are still active and could, therefore, create another opportunity to scale in or enter a trend midway through.
Dragonfly Doji in a Downtrend
When a dragonfly doji has formed in a downtrend it is regarded as a strong signal due to the swift change of power from the sellers to the buyers.
This happens because:
Buyers were able to push the price higher from the session low all the way back to the open price when the previous candlesticks have been bearish.
This shows the momentum may have switched.
Tip #3: The colour of the candlestick is irrelevant, it can either be red or green.
How To Trade Dragonfly Doji – Step By Step Guide:
Step 1: wait for confirmation – we must wait for the candlestick formation to be completed by waiting for it to close.
Step 2: place an order on the high/close of the dragonfly doji candlestick or open a market order once the candlestick has closed.
Step 3: Place stop loss at the low of the candlestick.
If the market pulls back towards the dragonfly doji’s low and trades even lower, then this invalidates the bullish signal and you would take a small loss.
Step 4: Take profit is always subjective to each trader, so this depends upon your risk management.
Usually, you can take a profit at the next resistance level.
However, as this is a trend reversal pattern you do not know how far the bullish trend would go.
So, the best thing you can do is stay open-minded with the trend and move your stop loss higher as and when you see fit.
This allows you to take advantage of the movement of the trend for as long as possible, therefore, increasing potential profits.
As simple as that.
Tip #4: The Dragonfly Doji can have a high wick above the body, but the high must be tiny, no more than 1-3 pips higher than the open.
Examples of a Dragonfly Doji
Let’s go over some examples of some dragonfly doji formations and how they appear and how they can be traded.
Strong signal in a downtrend
In this example, you can see that the pattern has formed accurately, and managed to reverse the trend as expected.
Strong signal with support
In this example, we see a stronger validation of the doji pattern with the use of a support level.
This example shows that buyers are back in the market (dragonfly doji pattern) and that price was rejected at that previous level (support level).
Therefore, two solid indications that the price may reverse.
Strong Signal with Bollinger Band Support
In this example, just like with a support level we see the dragonfly doji pattern reject the lower prices.
In addition, reacting to the lower Bollinger Band which means that at that point price was 2 standard deviations away from the mean (red moving average).
Therefore, potentially revert to the mean in the near future.
A weak signal in an uptrend
As you can see, you would have been stopped out 3 bars later, only to have continued higher.
In this example, there was no support level nor supporting indicator.
Weak signal with support
Following on from the previous example, by filtering trades using another indicator or a support level, you are able to enter a trade more accurately.
In this example, the trend continued for another two trading days.
Here is an example of when these candlestick patterns do not work during a downtrend.
Dragonfly Doji Pros v Cons
Let’s have a brief overview of the pros and cons of trading a dragonfly doji pattern.
Dragonfly Doji Pattern Pros
- Easy to spot
- A powerful bullish trend reversal pattern
- Can be used with other indicators
Dragonfly Doji Pattern Cons
- Rarely occur in higher time frames
- Can form mid-trend or in an upwards trend
- Demonstrates that the market is indecisive, therefore it could either continue in its direction or reverse.
Wrapping It Up
The dragonfly doji candlestick pattern is a solid trend reversal pattern that certainly should be part of your trading toolbox.
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.
Although they are uncommon, when they are confirmed, they can provide a valid bullish trend reversal indicator.
Especially if they are used with another indicator or support levels.
Tip #5: We tend to only see these chart patterns in Asian trading sessions, due to lower trading volumes.
Or most commonly in shorter time frames – 5-minutes to tick level time frames. This is due to the forex trading sessions being very small.