Dragonfly Doji Candlestick Pattern

What is the Dragonfly Doji Candlestick and How It Forms

It is a pattern that appears on the chart in the shape of an inverted “T”, consisting of a small body that forms when the open and close prices are nearly at the same level. This makes the candlestick body very small or non-existent.

The candle is characterized by a long lower wick or tail, indicating the asset’s price fluctuation between the open and close prices. It has no upper wick.

The pattern begins to form when the Bears (sellers) forcefully push the price downwards, forming the long lower tail. After that, the Bulls (buyers) intervene strongly and push the price back up from its lowest level to the open price.

The pattern indicates that the market has reached an Oversold state, and the Bears are no longer able to maintain their control. It signals an imminent trend reversal depending on where it appears:

If it appears at the bottom of a downtrend: It suggests the market has reached a state of selling saturation, and a potential upward move is coming. This reversal is confirmed when the next day’s candle opens higher and closes higher.

If it appears at the top of an uptrend: It indicates the market has reached an Overbought state, and a potential decline is likely. This drop is confirmed when the next day’s candle opens lower and closes lower.

How to Confirm the Dragonfly Doji Candlestick in Technical Analysis

First, ensure the pattern appears at the bottom of a clear downtrend. Its appearance after a sustained price decline lends strength and reliability to the bullish reversal.

Secondly, ensure the candle’s wick or lower tail is long and clearly defined. This indicates that the price experienced a sharp drop during the session, but the Bulls (buyers) intervened and pushed the price upwards forcefully. This signifies the market’s rejection of the decline.

Thirdly, ensure the candle’s body is small or nearly non-existent. The smaller the body, the closer the opening and closing prices appear, confirming minimal price movement during the trading day.

Lastly, confirm the absence of an upper tail or wick. This means the price failed to rise above the opening/closing price during the day, indicating that the open/close point is the highest price for the period.

Red vs. Green Dragonfly Doji: Which is More Important?

A Red Dragonfly Doji forms when the closing price is slightly less than the opening price, indicating that the Bears (sellers) regained control by a small margin.

Conversely, the Green Dragonfly Doji means the closing price is slightly higher than the opening price, indicating that the Bulls (buyers) still maintain some confidence and control.

However, the real significance lies not in the color of the candle itself, but in its shape and confirmation:

The long lower wick or tail of the candle confirms that the market rejected the price drop and that buyers have returned strongly.

The confirmation candle that follows the Dragonfly Doji, where a green candle confirms a potential uptrend, while a red candle confirms a potential downtrend.

In short: In a Dragonfly Doji pattern, look for the long wick or tail first, then confirm the trend with the candle that follows it.

Dragonfly Doji Trading Strategies

Trading the Bullish Dragonfly Doji (In an Uptrend)

When the Dragonfly Doji appears in an uptrend, it usually indicates the continuation of the upward trend. However, if the Bulls (buyers) fail to push the price above the open price, it may signal the beginning of a weakening in buying power (i.e., potential loss of momentum).

Entry (Buy): A buy position is entered when the next candle closes above the candle’s open/close price.

Stop-Loss: The stop-loss order is placed below the lowest point (tip of the lower wick).

Take-Profit: The take-profit is set at the nearest resistance level.

Trading the Bearish Dragonfly Doji (In a Downtrend)

When the pattern appears in a downtrend, it often indicates a potential bullish reversal.

Entry (Buy): You can monitor for bullish confirmations or enter a buy position. The buy order is placed either at the candle’s high or when the next candle closes above the candle’s open/close price.

Stop-Loss: The stop-loss order is placed below the lowest point (tip of the lower wick).

Take-Profit: The take-profit is set at the nearest resistance level or based on an appropriate Risk/Reward Ratio.

Risk/Reward Ratio: This is a calculation to determine whether the percentage of expected return or profit is worth the potential risk of the trade.

Example of Trading the Bullish Dragonfly Doji

The Dragonfly Doji candle in the image above appears at the bottom of a sustained downtrend. This is a bullish reversal signal.

Before entering, wait for the next candlestick to close above the open/close price of the Doji candle. This bullish close is a definitive confirmation that the Bulls (buyers) have indeed taken control.

Open a long position immediately after the confirmation candlestick closes, and place a stop-loss order below the lowest price reached by the lower wick of the candle. This manages risk in case the reversal fails and the downtrend continues.

Benefits of the Dragonfly Doji Candlestick in Technical Analysis

The appearance of the Dragonfly Doji candlestick pattern on the chart after a prolonged decline indicates a state of indecision and uncertainty between Bulls and Bears. Therefore, the reversal signal it provides is an effective tool for traders to make trading decisions and identify entry and exit points.

Traders typically open buy positions immediately upon the confirmation candlestick’s appearance. If it appears after a prolonged and sustained rise, traders consider it a short selling signal.

The pattern also helps in accurately determining stop-loss levels, allowing for informed decisions based on a clear understanding of the potential risk.

Limitations of the Dragonfly Doji Candlestick in Trading

The Dragonfly Doji candlestick pattern rarely appears on the chart, despite the regular occurrence of price reversals. Therefore, its signal cannot be considered entirely accurate unless its appearance is accompanied by a surge in trading volume. The pattern’s appearance with low trading volume makes it less reliable, even with the subsequent confirmation candle.

Sometimes, the size of the pattern’s candle or the subsequent confirmation candle is very large. This results in a significant gap between the entry point and the stop-loss point below the long tail. When the stop-loss is too large, the risk becomes disproportionate to the potential reward, forcing traders to find an alternative stop-loss point or close the position.

Because it is difficult to predict the extent of the price rise and the returns within this pattern, determining a profit target based solely on the pattern’s signal is challenging. It must be combined with other technical indicators, such as previous support and resistance levels and momentum indicators, to identify the optimal time to exit and take profits.

Dragonfly Doji vs. Hammer Candlestick

Similarities

The Hammer candlestick is the pattern most similar to the Dragonfly Doji. Both appear near the bottom of a downtrend. Both feature a small body and a long lower wick or tail. Both indicate that selling pressure has been met by strong buying pressure, suggesting a potential bullish reversal.

Differences

In the Dragonfly Doji, the open and close prices are almost identical to the day’s high. The candle’s body appears very small or almost non-existent. This makes it a more accurate indicator of a reversal.

Conversely, in the Hammer candlestick, the open and close prices are not identical, but the closing price is close to the day’s high. The candle’s body is small but remains visible.

Dragonfly Doji vs. Gravestone Doji

The Gravestone Doji pattern is the exact opposite of the Dragonfly Doji, as shown in the image above.

Dragonfly Doji resembles an inverted “T” shape and has a long lower wick or tail. It appears at the bottom of a downtrend and carries a bullish signal.

Gravestone Doji appears as a ”T” shape and has a long upper wick. It forms at the top of an uptrend, and its signal is bearish.

In nutshell

Avoid relying on any single price pattern, regardless of the strength or reliability of its signal. Its signal must be confirmed by other technical analysis tools, such as the Relative Strength Index (RSI) or Stochastic indicator, in addition to trading volume.

You can also benefit from the free Naqdi demo account, which allows you to trade with virtual money, to improve your trading skills, build your own strategy, and manage risk before engaging directly in the markets without prior experience.

Furthermore, you can benefit from the Education and Analysis section available on the Naqdi platform, whether you prefer visual or written content. Additionally, Naqdi offers free webinars. For more information, please visit the Naqdi platform.