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 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 trends movement for as long as possible, therefore, increasing potential profits.
As simple as that.