Dragonfly Doji is a sort of candlestick pattern that, based on prior price activity, might indicate a future price reversal to the downside or upside.
When the asset’s high, open, and close prices are all the same, it forms a triangle.
The extended bottom shadow indicates that intense selling occurred over the candle’s lifetime, but the fact that the price closed near the open indicates that buyers were able to absorb the selling and bring the price back up.
Important Points to Remember:
• A dragonfly doji might appear following a price increase or decrease.
• The open, high, and close prices are all identical, while the period’s low is much lower than the previous three. The result is a “T” form.
• After a price gain, a dragonfly doji appears, signalling a possible price fall. Confirmation comes in the form of a move lower on the next candle.
• After a price drop, a dragonfly doji warns that the price may rise. If the following candle rises, it confirms the trend.
• Before acting on the dragonfly doji, most candlestick traders wait for the confirmation candle.
What Is the Meaning of the Dragonfly Doji?
The dragonfly candlestick, which appears after a downturn, may indicate that a price increase is on the way.
Following an uptrend, it indicates that additional selling is entering the market, which could lead to a price decrease.
The candle that follows the dragonfly doji must indicate the direction in both circumstances.
The dragonfly doji pattern doesn’t appear very often, but when it does, it’s a hint that the trend is about to shift.
The dragonfly’s lengthy lower shadow after a price gain indicates that sellers were able to take control for at least part of the period.
While the price remained steady at the end of the time, the increase in selling pressure is a red flag.
A bearish dragonfly must be followed by a candle that confirms the reversal. The following candle must drop and close below the dragonfly candle’s closing.
The reversal signal is nullified if the price increases on the confirmation candle, as the price may continue to rise.Following a price decrease, the dragonfly doji indicates that sellers were present early in the timeframe, but purchasers had driven the price back to the open by the end of the session. During a downtrend, this signals rising purchasing pressure, which could foreshadow a price rise higher.
If the candle that follows the dragonfly rises and closes above the dragonfly’s closure, the signal is confirmed.
The more reliable the reversal is, the stronger the surge on the day after the bullish dragonfly.
Traders usually enter trades during or soon after the confirmation candle has finished. A stop loss might be placed below the dragonfly’s low if entering long on a bullish reversal.
A stop loss can be placed above the dragonfly’s peak if entering short following a bearish reversal.
Because the candlestick pattern can be a sign of uncertainty as well as an outright reversal pattern, the dragonfly doji works best when combined with other technical indicators.
A dragonfly doji with a large volume is more trustworthy than one with a small capacity. The confirmation candle should ideally have a big price movement and high volume.
The dragonfly doji can also appear as part of a bigger chart design, such as the end of a head and shoulders pattern.
Rather than depending on a single candlestick, it’s critical to consider the big picture.
An Example of Using the Dragonfly Doji
Because the open, high, and close of a dragonfly doji are rarely the same, they are extremely unusual.
Between these three pricing, there are frequently minor differences. A dragonfly doji appeared during a sideways correction within a longer-term uptrend in the illustration below. The dragonfly doji dips below recent lows before being carried higher by the bulls.
Following the dragonfly, the price rises on the next candle, indicating that the price is returning to the upside.
Traders would buy near or during the confirmation candle. A stop-loss can be set below the dragonfly’s low.
The example demonstrates the versatility of candlesticks. Coming into the dragonflies, the price was not decreasing aggressively, but it did dip and then be pushed back higher, confirming that the price was going to remain rising.
The dragonfly pattern and the confirmation candle, when viewed in context, indicated that the short-term correction had ended and the uptrend had resumed.
What’s the Difference Between the Gravestone Doji and the Dragonfly Doji?
When the low, open, and close prices are all the same and the candle has a long upper shadow, the result is a gravestone doji
.The gravestone is in the shape of an upside-down “T.” The gravestone has the same meanings as the dragonfly.
Both indicate prospective trend reversals, but only the following candle may prove it.
Use of the Dragonfly Doji Has Its Limits
Due to the rarity of the dragonfly doji, it is not a viable method for detecting most price reversals.
When it does happen, it isn’t always accurate. Following the confirmation candle, there is no guarantee that the price will continue in the expected direction.
The size of the dragonfly coupled with the size of the confirmation candle can sometimes mean the entry point for a trade is a long way from the stop loss location.
This means traders will either need to relocate their stop loss or abandon the trade because a stop loss that is too large may not justify the deal’s potential gain.
Because candlestick patterns rarely provide price goals, estimating the potential profit of a dragonfly trade can be tricky.
Other tools, like as candlestick patterns, indications, or tactics, are needed to exit a trade when and if it is lucrative.
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