Dragonfly Doji Candlestick Pattern What Is And How To Trade

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A Dragonfly Doji is a type of candlestick pattern that can signal a potential reversal in price to the downside or upside, depending on past price action. It’s formed when the asset’s high, open, and close prices are the same. In addition to the reliability concern, another limitation of the doji pattern is that it cannot provide price targets.

1. This pattern suggests that during a trading session, the security’s price fell significantly but recovered by the end of the session to close near the opening price.
2. The candle that comes after must drop and close below the dragonfly candle’s close.
3. When the price heads back up to the near-high close, dragonfly tells you, demand is starting to outweigh the supply.
4. A Dragonfly Doji is typically a more accurate indicator of a reversal.
5. As you probably remember by now, the pattern is a bullish or bearish reversal pattern depending on if it’s preceded by an up or downtrend.
6. Stop-loss orders are positioned below the price low of the pattern when taking long bets on a bullish Dragonfly Doji reversal.

Trading Strategies Using Dragonfly Doji

It suggests that sellers have been in control, pushing the price down, dragonfly candlestick but buyers have regained control, pushing the price back up to close near the opening price. This pattern can indicate that the market may be ready for a potential uptrend. However, as with a bullish market, it is essential to consider other factors to confirm this potential reversal. The dragonfly doji in bearish trends may suggest a possible upward reversal. The long lower shadow indicates that buyers entered the market, pushing the price up from its lows.

This long lower wick indicates that sellers sold actively during the timeframe of the candle. Price was able to bounce back and close near the high since the candle closed near the open. We put all of the tools available to traders to the test and give you first-hand experience in stock trading you won’t find elsewhere. Each day we have several live streamers showing you the ropes, and talking the community though the action.

The dragonfly doji is used to identify possible reversals and occurs when the open and closing print of a stock’s day range is nearly identical. The dragonfly doji is not a common occurrence and it is not a reliable tool for spotting most price reversals. There is no assurance the price will continue in the expected direction following the confirmation candle.

Strategy 1: Pullbacks On Naked Charts

The candle following a potentially bearish dragonfly needs to confirm the reversal, which means, the candle following must drop and close below the close of the dragonfly candle. If the price rises on the confirmation candle, the reversal signal is invalidated as the price could continue rising. The body can either be filled (negative candlestick) or hollow (positive candlestick).

Dragonfly Doji Candlestick Trading Strategy

In this strategy example, we’ll go both short and long on the dragonfly doji pattern. As you probably remember by now, the pattern is a bullish or bearish reversal pattern depending on if it’s preceded by an up or downtrend. Overall, understanding the unique characteristics of a dragonfly doji can help traders and investors identify potential market trends and make informed trading decisions.

The dragonfly has a long lower shadow with little to no upper shadow, indicating a potential bullish reversal. In contrast, the long-legged version has long upper and lower shadows, reflecting significant indecision and equal pressure from buyers and sellers without a clear directional bias. The long lower shadow indicates that prices fell significantly during the trading period but managed to close near the opening level or higher. The Dragonfly Doji is considered a bullish reversal pattern when it appears after a downtrend.

1. The hammer typically appears after a downtrend, signalling a reversal, while the dragonfly doji appears in uptrends and downtrends.
2. A Dragonfly Doji signals that the price opened at the high of the session.
3. The dragonfly doji should be traded using a bearish bounce strategy, using the high as a stop and the close as your entry in all markets into a large bullish move.
4. Candlestick patterns like the dragonfly doji have gained incredible popularity in late years.
5. For instance, a Doji that appears in an uptrend may indicate that the buying pressure is subsiding and a bearish reversal might be forthcoming.
6. We also offer real-time stock alerts for those that want to follow our options trades.
7. Market factors and subsequent price action may not follow the signal provided by the Doji.

Strategy 4: Trading The Dragonfly Doji With RSI Divergences

This indicates that sellers controlled the market for most of the period, driving prices down, but by the end, buyers pushed prices back up to the opening level. This candlestick pattern signals a higher degree of indecision as prices swung considerably high and low within the period, but ended nearly unchanged. The Basic Doji, sometimes referred to as a “Neutral Doji,” is represented by a plus sign (+) on the candlestick chart. This occurs when the opening, closing, high, and low prices are all different, with a virtually non-existent body and comparable upper and lower wicks.

Reversals usually happen when a stock hits support or resistance and does not break. For example, you can use moving average lines like the simple moving average or VWAP to guide support and resistance. In this strategy example, we use the ADX indicator, one of our favorite indicators, to measure market volatility and go long if we have high market volatility. In the strategy examples below, we’ll use the ADX indicator, which is one of our favorite trading indicators, to measure the trend strength. All these conditions could work quite differently, even when tested on the same market.

You should consider whether you can afford to take the high risk of losing your money. The Dragonfly should be verified by waiting for trend confirmation on the following day. The size of the dragonfly coupled with the size of the confirmation candle can sometimes mean the entry point for a trade 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. In addition, the dragonfly doji might appear in the context of a larger chart pattern, such as the end of a head and shoulders pattern.