Dragonfly doji candlesticks are reversal candlesticks found at the bottom of downtrends. They are shaped like a T and signal a potential reversal to a new uptrend. They have a long shadow and almost no upper body. Enter a trade long on the break above the top of the candle.
What Is a Dragonfly Doji Candlestick?
Dragonfly doji candlesticks are indecision candlesticks and are not as common as other patterns. However, they are part of the doji family. They look like a T with a long lower shadow and no upper wick. Often, they appear black or neutral on stock charts.
The dragonfly doji candlestick is a more difficult pattern to find. These candlesticks tell a story, whether used alone or in a group.
This is an example of a dragonfly doji. Traders would take a long entry on the bullish candlestick that breaks above the dragonfly. They would place their stop loss on a bearish candlestick close below the base of the dragonfly. You’ll notice that this pattern also resembles a hammer, but with a smaller real body. They are especially effective when found at the bottom of a downtrend, signaling a bullish reversal.
Dragonfly Doji Basics
Candlesticks have 4 data entries that form them. Dragonfly doji candlesticks form when the opening, high of the day, and closing are all the same, but the day’s low creates a long shadow. As a result, they look like a T.
It has a long lower wick but no top wick. This indicates that there were numerous sellers for most of the day. As a result, buyers came in at the end of the day and pushed the price back up. The price returns to the day’s high, forming the T shape. These indecision candlesticks indicate a potential reversal.
What a Dragonfly Doji Tells You
Dragonfly doji candlesticks show a reversal. However, the implications of said reversal depend on price action and confirmation. The long wick shows evidence of buying pressure. There is, however, a long tail, so sellers are also abundant.
Sometimes, the stock price doesn’t accurately reflect its value because it has fallen to a low level. The bulls see that and return to buy, increasing the price. It’s all about supply and demand. When the price heads back up to the near-high close, Dragonfly tells you that demand is starting to outweigh the supply.
Technical Analysis
A dragonfly doji candlestick pattern, when used in conjunction with technical analysis, can be a powerful tool. These candlesticks form around support and resistance depending on the stock trend. These are indecision candles that help confirm reversals in the market.
Reversals typically occur when a stock reaches support or resistance and fails to break through. That’s why you need to know the technicals. For example, you can use moving average lines, such as the simple moving average or VWAP, to guide your understanding of support and resistance.
Real bodies of candlesticks and wicks are also commonly used to identify support and resistance levels. After a downtrend, when they are found at the support, this can signal a bullish reversal.
This can signal a bearish reversal after an uptrend when it is encountered at resistance. Again, candlesticks and moving averages are crucial for identifying support and resistance levels.
Dragonfly Doji Candlestick Trading Strategy
- Traders take a long position when the price breaks above the candlestick’s high.
- They use a candlestick close below the low as a stop level.
- They might take a shot at the break of the low and use a candlestick close above the high as a stop.
Dragonfly Doji Candlestick Example
This is a 15-minute Dragonfly reversal on $MSFT. The stock gained several percent after. The pattern developed at the base of a bull flag pattern, resembling a falling wedge. When the reversal occurred, it developed into a rising wedge pattern. It also appeared to be a cup and handle pattern. You could also see the right shoulder of an inverse head and shoulders pattern.
Microsoft (MSFT) Uptrend Example
The picture above is a daily chart of $MSFT. The highlighted candle resembles a dragonfly doji but has a slight upper wick. This could be called a long-legged doji. Although this isn’t technically a dragonfly, it tells a similar story; however, this is an example found during an uptrend.
You’ll notice that this dragonfly candle happened at the apex point of the preceding rising wedge pattern. This is a bearish signal that the bulls were losing steam. After the candle formed, the price went into a bearish megaphone pattern. However, this was a temporary pullback that consolidated, turning into a bull flag breakout and the continuation of the bullish trend.
Dragonfly Doji Fakeout
This is an example of a brief dragonfly fakeout. You’ll notice that the price briefly increased, forming a gravestone doji candlestick. This could have gotten the bulls to cover their positions. However, the candle didn’t close below the dragonfly. The next candle was a bullish spinning top candlestick, continuing the uptrend. Take note of the double bottom formation as well.
Final Thoughts on Dragonfly Doji Candlesticks
Dragonfly doji candlesticks are a popular bullish reversal candlestick. They are most effective when found at the base of a downtrend. You’ll also see them in upgrades commonly found in pullback areas, which form flags and pennants that break out and continue the bullish trend. The benefit of these patterns is that they provide traders with clearly defined stop loss levels, which is important to have as a trader. Use proper risk management techniques when trading a dragonfly doji candlestick.
Frequently Asked Questions
A dragonfly doji candlestick is typically a bullish candlestick reversal pattern that forms at the bottom of a downtrend. They look like a hammer candlestick, but have much thinner real bodies. They are also found at support levels, signifying a reversal to the bullish upside.
A dragonfly doji indicates a bullish reversal pattern. It appears to be a hammer pattern, indicating that support is holding and the price is poised to reverse to the bullish side.
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 trend that follows the reversal.
