Dragonfly doji is one of the most underrated candlestick patterns because it’s an uncommon occurrence in chart patterns.
Therefore, not making it very exciting to learn about.
That being said, we feel that it is important to learn about because it can signal a change in trend – so it’s better to learn about it and be able to react to the candlestick pattern, instead of looking at it and wondering what it is…
In this quick 10-minute guide, we’ll get you to an expert level of knowledge on spotting Dragonfly Doji chart patterns and how you can take advantage of them.
What is a Dragonfly Doji
A dragonfly doji is formed when the buyers in the market have essentially managed to push the session’s candlestick from a session low back to the sessions 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 is confirmed when the high, open and close prices are equal, or very similar, whilst there is a long wick which has created a session low.
The longer the wick, the more significant the move can be.
Just imagine 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/profit taking 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 trader, will allow you to respond appropriately.
One of the most important aspects to remember when trading is to ensure that the candlestick pattern has been confirmed by the session close.
It is common for beginners to see a dragonfly doji in an open session and they trade what they see.
However, because the candlestick pattern is 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 chart pattern is that it doesn’t appear too often, in comparison to other candlestick patterns.
A dragonfly doji 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 chart pattern appearing.
That being said, most commonly the dragonfly doji forms 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 chart pattern is very straight forward.
Upon spotting a completed dragonfly doji candlestick, 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:
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
The list can go on, but you get the image.
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.
The dragonfly doji by itself isn’t necessarily a candlestick pattern to justify a buying signal, rather it highlights that there is a potential reversal.
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 which is down to the sellers and buyers becoming indecisive of where they want to take the market.
This can lead to two forms of signals, a weak signal, and a strong signal 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.
As the dragonfly doji had formed in an uptrend, that means the buyers are in control, therefore for the sellers to enter and try to close the price lower is considered a weak signal too.
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.
A dragonfly doji in a downtrend that is confirmed by the market is strong because the 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. However, it is a stronger signal if the dragonfly doji is green and at the bottom of the trend.
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. The most important factor to define the chart pattern is that the open and close are the same.
To trade the Dragonfly Doji is straight forward:
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.
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 formation) 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 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), and would, therefore, potentially revert to the mean in the near future.
A weak signal in an uptrend
In this example, we demonstrate a weak doji example. As you can see, you would have been stopped out 3 bars later, only to have continued higher. There is no way to protect yourself from these types of opportunities apart from only taking these trades when the trend is strong and there is another second indicator supporting the candlestick. 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 chart pattern.
Dragonfly Doji Pros
Easy to spot
A powerful bullish trend reversal pattern
Can be used with other indicators
Dragonfly Doji 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. 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 pattern formations 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 trading sessions being very small.
The dragonfly doji is just one of many types of candlesticks you can learn about. We hope this 10-minute guide has brought you up to speed with the candlestick pattern, or become a great reference point for you.
If you are interested in learning more about trading and want to learn how to trade the Forex markets, then we offer an incredible free forex trading course. You can check it out here:
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