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 trade long on the break above the top of the candle.
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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. Many times, they are black or neutral on stock charts.
The dragonfly doji candlestick is a more difficult pattern to find. These candlesticks tell a story, whether alone or together with 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 looks like a hammer but with a smaller real body. They are especially effective when found at the bottom of a downtrend signaling a bullish reversal.
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 tells that there were a lot of 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 show signs of a reversal.
What It 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 that long tail, though, so sellers are also abundant. They are much harder to find but are reliable reversal signs within a defined trend.
Sometimes, the stock price doesn’t show its value because it has fallen so low. 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, demand is starting to outweigh the supply.
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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 high as a stop.
Technical Analysis
A dragonfly doji candlestick pattern used with technical analysis can be powerful. These candlesticks form around support and resistance depending on the stock trend. These are indecision candles that help confirm reversals.
Reversals usually happen when a stock hits support or resistance and does not break. That’s why you need to know technicals. For example, you can use moving average lines like the simple moving average or VWAP to guide support and resistance.
Real bodies of candlesticks and wicks are also commonly used to find support and resistance. 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 found at resistance. Again, candlesticks and moving averages are vital to support and resistance.
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, which looked like a falling wedge. When the reversal took place, it turned into a rising wedge pattern. It also looked like a cup and handle pattern. You could also see the right shoulder of an inverse head and shoulders pattern.
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 that continued the uptrend. Take note of the double bottom formation as well.
$MSFT Uptrend Example
The picture above is a daily chart of $MSFT. The highlighted candle looks very close to a dragonfly doji but had a little upper wick. This could be called a longe legged doji. Even though this isn’t technically a dragonfly it tells a similar story, however, this is an example that is 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 single that the bulls were losing steam. After the candle formed price went into a bearish megaphone pattern. However, this was a temporary pullback and was consolidation that turned into a bull flag breakout and continuation of the bullish trend.
Final Thoughts
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 that form flags and pennants that break out and continue the bullish trends. The benefit of these patterns is that they provide traders with clearly defined stop loss levels, which is important to have as a trader.
Frequently Asked Questions
A dragonfly doji candlestick is typically a bullish candlestick reversal pattern found at the bottom of downtrends. 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 looks like a hammer pattern and signals that support is holding and the price is about 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 pattern after the reversal.
