Dragonfly Doji: Definition, Structure, Trading, Examples

Traders typically enter trades during or shortly after the confirmation candle completes. If entering long on a bullish reversal, a stop loss can be placed below the low of the dragonfly. If entering short after a bearish reversal, a stop loss can be placed above the high of the dragonfly. The signal is confirmed if the candle following the dragonfly rises, closing above the close of the dragonfly. The stronger the rally on the day following the bullish dragonfly, the more reliable the reversal is. The Three Inside-Up Pattern consists of three candlesticks, indicating a bullish reversal.

1. Of course, the pattern requires certain situations for it to appropriately form.
2. Testimonials appearing on this website may not be representative of other clients or customers and is not a guarantee of future performance or success.
3. This is because the price hit a support level during the trading day, hinting that sellers no longer outnumber buyers in the market.
4. The opposite of a Dragonfly, a Gravestone Doji has a long upper wick and no lower wick.
5. Traders would take a long entry on the bullish candlestick that breaks above the dragonfly.
6. Therefore, you must use other technical indicators combined with in-depth fundamental analysis to make an informed decision.

Algorithmic Trading

The Dragonfly Doji is a reliable sign of a trend reversal when it appears at the bottom of a downtrend. This is due to the price reaching a support level during the trading day, which suggests that the market’s sellers are no longer outnumbering the buyers. Volume plays an essential role during the formation of a Dragonfly Doji. A surge in volume during the pattern’s formation provides extra confirmation of a potential bullish reversal, as it suggests increased buying pressure.

Like most form of technical analysis, there’s always a chance a pattern does not fully indicate what is to come. A Dragonfly Doji is a type of candlestick pattern that can signal a potential price reversal, either to the downside or upside, depending on past price action. It forms when the asset’s high, open, and close prices are the same. The pattern is more significant if it occurs after a price decline, signaling a potential price rise.

It suggests that sellers have been in control, pushing the price down, 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. This suggests additional buying pressure during a downtrend and could anticipate a price gain. The signal is validated if the candle following the dragonfly raises, closing above the dragonfly’s close.

How To Spot a Dragonfly Doji Pattern on a Chart

Traders watch for the pattern to develop after a pullback in an uptrend because it signals a change in purchasing pressure and the potential end of the pullback. The formation of a green Doji can signal that the market may pivot from this point, in case it has been in a continuous downtrend during the previous trading periods. The occurrence of a green Doji during an uptrend indicates that the stock is about to break out.

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Each candlestick represents these four points and gives traders a comprehensive view of market activity. It will always work best when you are using it with your other technical analysis and favorite trading indicators. The dragonfly doji can signal both a potential reversal to the upside or downside. Whilst it is fairly straightforward and simple to identify, the dragonfly doji does not form all that often compared to other candlestick patterns. Candlestick patterns should not be relied upon as the sole factor in trading decisions.

Each day our team does live streaming where we focus on real-time group mentoring, coaching, and stock training. We teach day trading stocks, options or futures, as well as swing trading. Our live streams are a great way to learn in a real-world environment, without the pressure and noise of trying to do it all yourself or listening to “Talking Heads” on social media or tv. The dragonfly doji has a 55.3% success rate, depending on the setup. It’s a smaller reversal candle, and the success of the pattern depends on the strength of the bullish pattern after the reversal. 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.

1. However, the price then recovers and closes at the price it opened at, which signals strength within the market.
2. A dragonfly doji candlestick is typically a bullish candlestick reversal pattern found at the bottom of downtrends.
3. The dragonfly doji is a type of doji that opens and closes near the high.
4. Dragonfly Doji is a basic candle shaped like a Hanging Man pattern (in an uptrend) or Takuri Line (in a downtrend).

Please keep in mind that these are not meant for live trading, but to show you how we think when building trading strategies. In this part of the article, we wanted to show you a couple of different trading strategy examples. Depending on the strength of the trend, different levels are more likely to work better with the Dragonfly Doji pattern. Here you can learn more about the different Fibonacci retracement levels. To find a bullish RSI Divergence we want to see the price on a downtrend first, making lower lows and lower highs.

To understand how to incorporate EMAs into your trading strategy, explore this detailed guide on EMA stocks. Below is an example of a doji pattern that will often fake out a lot of traders. This candlestick is up at the extreme high and will often signal price is about to move back lower and not higher as most will look to trade the dragonfly doji. The trader placed a buy order at the high of the doji with a stop-loss level below it. Traders and investors can use the pattern as a signal to enter or exit positions.

These candles’ open and close prices exceed the previous day’s prices. The pattern is significant because it indicates that despite selling pressure, buyers were able to push the price back up, showing their strength. This often signals a potential reversal in market direction, making it a pattern traders should not ignore.

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What makes a pattern valid is not just the shape, but also the location where it appears. The candle may or not have a wick at the top, but if it has, must be small. This is for informational purposes only as StocksToTrade is not registered as a securities broker-dealer or an investment adviser. This article represents the opinion of the Companies operating under the FXOpen brand only.