Title: Dragonfly Doji Candlestick — What It Is, How to Read It, and Practical Trading Steps
Source: Investopedia — “Dragonfly Doji” (Jessica Olah). https://www.investopedia.com/terms/d/dragonfly-doji.asp
1) What is a Dragonfly Doji?
– Definition: A dragonfly doji is a single candlestick where the open, high, and close are (nearly) the same price and there is a long lower shadow (wick). Visually it looks like a “T” with a long tail down.
– What it implies: The long lower shadow shows sellers pushed price down during the period, but buyers recovered the move and closed the period back at the top of the range. That intraperiod rejection of lower prices can signal a possible reversal — bullish if it appears after a downtrend, or potentially bearish if it appears after an uptrend (because it shows meaningful selling pressure during the period).
2) Why context matters
– Trend context: A dragonfly doji is interpreted differently depending on the prior price action. After a sustained decline it can signal buying interest and a potential bottom. After a rally it can be a warning that selling is entering the market.
– Volume and follow-through: The pattern is more trustworthy when accompanied by higher-than-normal volume and when the next candle “confirms” the move (see confirmation rules below).
– Rarity: Because open, high and close must be the same (or nearly so), true dragonfly dojis are relatively rare. Minor discrepancies still occur in practice and traders accept “near” equality.
3) Confirming the signal (rules)
– Bullish confirmation (after a downtrend): The candle after the dragonfly should close above the dragonfly’s close. The stronger the follow-through (bigger candle body + volume), the more reliable the reversal signal.
– Bearish confirmation (after an uptrend): The candle following the dragonfly should close below the dragonfly’s close, confirming downward momentum.
– If the next candle moves opposite the expected direction, the signal is invalidated.
4) Dragonfly Doji vs related patterns (quick comparisons)
– Gravestone doji: The inverse — long upper shadow, open/low/close at the same level. Often interpreted as a possible top reversal.
– Spinning top vs doji: A doji’s real body is tiny (open ≈ close). If the real body is a measurable percentage of the total range (commonly > ~5%), it’s a spinning top rather than a doji.
– Dragonfly doji vs hammer: Both can appear at bottoms but the hammer has a small real body near the top of the range (open and close not identical). Dragonfly has open ≈ close at the top with a nearly zero upper wick.
– Other reversal patterns: Engulfing, morning/evening star, harami, shooting star, inverted hammer, etc. Use multiple patterns/indicators together.
5) Limitations and risks
– Not highly reliable alone: Candlestick patterns are probabilistic, not definitive. Confirming price action and supporting indicators are essential.
– No inherent price target: Candlestick patterns give a bias but not a precise exit target; combine with other techniques (support/resistance, measured moves, ATR-based targets).
– Potentially wide stop: The low of the dragonfly can be far from a practical entry; large stops may make a trade unacceptable for your risk profile.
– False signals in low-volume, choppy, or illiquid markets.
6) Practical step-by-step trading process (entry, risk, management)
1. Scan and identify
– Screen your chosen timeframe for candles with a long lower wick and open ≈ high ≈ close (or “open ≈ close ≈ high”).
– Prefer patterns that occur near logical supports, prior lows, moving averages, or trendline confluence.
2. Check context & volume
– Confirm the recent trend (downtrend for bullish interpretation).
– Look for higher-than-normal volume on the dragonfly or — preferably — on the confirming candle.
3. Wait for confirmation
– For a bullish setup, wait for the next candle to close above the dragonfly’s close.
– For a bearish setup (after an uptrend), wait for the next candle to close below the dragonfly’s close.
4. Enter the trade
– Enter on completion of the confirmation candle (either at the close or on a pullback to the confirmation candle’s body, per your strategy).
5. Place stop loss
– Typical stop (bullish): below the low of the dragonfly (or below nearby structural support).
– Typical stop (bearish): above the high of the dragonfly.
– If that stop is too wide, either adjust risk sizing or skip the trade.
6. Define exit / profit target
– Use nearby resistance/support, measured moves, trailing stop (e.g., ATR-based) or a risk-reward ratio to plan exits.
– Consider scaling out as price advances.
7. Position sizing
– Calculate position size so that the dollar risk (distance to stop × size) fits your risk per trade (e.g., 0.5–2% of account).
8. Manage trade
– Re-evaluate if price action fails to follow through (e.g., price reverses through the stop).
– Use trailing stops or technical levels to lock in profits on sustained moves.
9. Record and review
– Log the setup, entry, stopping point, outcome, and lessons learned. Backtest and refine over many trades.
7) Practical examples (hypothetical)
– Bullish example: A stock in a short-term downtrend forms a dragonfly doji at a prior support zone. Next day’s candle is a large bullish bar closing above the dragonfly close with heavy volume. Enter long at confirmation close or on small pullback, stop below the dragonfly low, target first resistance.
– Bearish example: During an uptrend, a dragonfly doji with an unexpectedly large lower shadow appears (indicating intraday selling). Next candle closes below the doji close; short entry with stop above the doji high.
8) Best practices & checklist before trading a dragonfly doji
– Is the candle clear (open ≈ high ≈ close) and visible on your timeframe?
– Is the pattern sitting at a meaningful technical level (support, trendline, moving average)?
– Is volume supportive (especially on confirmation)?
– Is the confirmation candle decisive and in the expected direction?
– Can you define a reasonable stop and position size that fits your risk rules?
– Do other indicators (RSI, MACD, order flow, multi-timeframe confirmation) support the bias?
– Have you planned exits (targets or trailing rules)?
9) Bottom line
The dragonfly doji is a visually striking candlestick that can signal intraperiod rejection of lower prices and a potential reversal. It should never be used in isolation. Look for proper trend context, volume, and a confirming candle before trading it; combine it with sound risk management and other technical tools. Because of its rarity and limitations, treat it as one signal among many in your trading toolkit.
Reference
– Investopedia: “Dragonfly Doji” — Jessica Olah. https://www.investopedia.com/terms/d/dragonfly-doji.asp
If you’d like, I can:
– Produce a checklist you can print and use while scanning charts.
– Backtest the dragonfly + confirmation rule on a specific symbol/timeframe (requires data).