What Is a Dragonfly Doji Candlestick?

What Is a Dragonfly Doji Candlestick?

Let me explain what a Dragonfly Doji is—it's a candlestick pattern that can indicate a potential reversal in price, either downward or upward, based on the previous price movement. You see it when the asset's high, open, and close prices are all the same.

That long lower shadow tells you there was heavy selling during the candle's period, but the close near the open means buyers stepped in, absorbed the selling, and drove the price back up.

Key Takeaways

You can spot a Dragonfly Doji after a price increase or decrease. The open, high, and close match, with the low much lower, forming a 'T' shape.

If it appears after a price rise, it warns of a possible drop, confirmed by a lower close on the next candle. After a decline, it suggests a rise, confirmed by a higher close next.

As a trader, you should wait for that confirmation candle before making a move on the Dragonfly Doji.

Understanding the Dragonfly Doji Candlestick

After a downtrend, this pattern might mean a price increase is coming. After an uptrend, it shows more sellers entering, possibly leading to a decline. In either case, check the next candle for confirmation.

This pattern doesn't show up often, but when it does, it's a sign the trend could shift. Following an advance, the long lower shadow means sellers controlled part of the period, and even though it closed unchanged, that selling pressure is a red flag.

For a bearish signal, the next candle needs to drop below the Dragonfly's close to confirm. If it rises instead, the reversal is off, and prices might keep going up.

After a decline, the Dragonfly indicates sellers were active early, but buyers pushed it back to the open by the end, showing buying pressure that could lead higher.

Confirmation comes if the next candle closes above the Dragonfly's close—the stronger the rally, the better the signal.

You'd typically enter trades during or right after the confirmation candle. For a long position on a bullish reversal, place a stop loss below the Dragonfly's low. For short on bearish, above the high.

I recommend using the Dragonfly Doji with other indicators, as it can signal indecision or a true reversal. High volume makes it more reliable, especially on the confirmation candle.

It might also fit into bigger patterns, like the end of a head and shoulders. Always consider the full chart, not just one candle.

Example of How to Use the Dragonfly Doji

Dragonfly Dojis are rare because the open, high, and close rarely match exactly—there are usually small differences. Take this example: one appeared during a sideways correction in a longer uptrend. It dipped below recent lows but buyers quickly pushed it higher.

After that, the next candle moved up, confirming the upward continuation. You'd buy during or after that confirmation, with a stop loss below the Dragonfly's low.

This shows candlesticks' flexibility. The price wasn't in a sharp drop before the Dragonfly, but it still fell and bounced back, signaling the correction ended and the uptrend resumed.

Dragonfly Doji vs. Gravestone Doji

A Gravestone Doji happens when the low, open, and close are the same, with a long upper shadow, looking like an upside-down 'T.' Its implications match the Dragonfly's—possible reversals, but confirm with the next candle.

Limitations of Using the Dragonfly Doji

This pattern isn't common and isn't reliable for spotting most reversals. Even when it appears, it doesn't always work—there's no guarantee the price follows the expected direction after confirmation.

The Dragonfly's size and the confirmation candle can place your entry far from the stop loss, making the risk too high compared to reward. You might need to adjust the stop or skip the trade.

Figuring potential reward is tough since these patterns don't give price targets. You'll need other methods, like more patterns or indicators, to decide when to exit profitably.

What Is the Dragonfly Doji Used for?

You use the Dragonfly Doji to spot possible reversals when a stock's open and close are nearly identical for the day.

What Is the Difference Between a Doji and a Spinning Top?

Spinning tops look like Dojis with close open and close, but they have larger bodies. A Doji's body is up to 5% of the candle's range; bigger than that, it's a spinning top.

What is the Difference Between a Dragonfly Doji and a Hammer?

Both are bullish reversal patterns at downtrend bottoms, but the Dragonfly has open and close at the same level, while the Hammer has a small body at the top with slightly different open and close. Use them with other indicators for best results.

Are There Any Other Candlestick Patterns That Signal Trend Reversals?

Yes, patterns like engulfing, morning and evening stars, harami, shooting star, and inverted hammer also signal potential reversals.

The Bottom Line

In summary, the Dragonfly Doji is a candlestick that can signal reversals up or down based on context, with matching high, open, and close, and a long lower shadow showing selling absorbed by buyers. It's stronger after a decline for an upside move, or after an advance for a downside. Always confirm with the next candle.