Recall from our post on regular Doji candlesticks, the Open and Close price in a doji are the same. Suggesting a tie between bulls and bears. While this is true for all Doji’s, in some cases a stronger side is prevalent. One such case being the Dragonfly Doji.
What Is a Dragonfly Doji? – Bullish Doji Candlestick
In a Dragonfly Doji the bulls prevail, making it a bullish candlestick. And when found under certain candlestick patterns (context), the dragonfly doji could signify price reversal.
Opposite to the Gravestone Doji in our last post, The Dragonfly doji can be spotted as a "T" candlestick on a chart. The price breakdown of the doji suggests a complete Buy-back of a once Red Candlestick (Refer to "Low" in Image). Essentially wiping off any price decline the candlestick may have had (refer to image ).
A Dragonfly Doji In Perspective
To put it into perspective, here’s a quick dissection of the Dragonfly Doji. Refer to Image 1 - You’ll notice the candle opened at $5. The bears pushed it down right off the bat to $1. A push to the downside, without as much as a tick to the upside, is quite a feat. The initial bearish momentum clearly dwarfed the bull effort.
However, as the candle played out, bulls started to buy-back the asset quite heavily (Refer to Image 2). The buying pressure got to a point where the price was back to $5 - back to the Open price. The Bulls managed to support price at $5 until the candle Close (Refer to Image 3).
Such price action would render a Dragonfly Doji. Suggesting Bulls are the stronger force, and are in control.
What must be noted here is that the Bulls, despite being initially dwarfed by tremendous Sell pressure, made a swooping comeback. Not only did the Bulls push price back up to the Open at $5, they supported it until candle Close.
In a dragonfly doji the momentum is with the Bulls (buyers), and price is likely to see continuation to the upside. This simple truth makes the dragonfly doji a bullish candlestick and a great price forecaster. It’s easy to pick the most profitable side of a trade (Bull/Bear), when you know where market momentum lies.
Dragonfly Doji - A Reversal Candle?
Doji’s with strong Bullish or Bearish implications, like the dragonfly doji, often make for good reversal candles. However, this is only true when found under the right candlestick patterns (context).
For a Dragonfly Doji to be a reversal candle, there should have been a preceding downtrend. Given the bullish implication of the dragonfly doji, it can only logically “reverse” an ongoing downtrend.
Note that they make for better reversal candles on Overextended dumps/downtrends. If a dragonfly doji is found during the early stages of a downtrend, it may just signify a short pause, or relief before the trend continues down.
Trading the Dragonfly Doji
While the dragonfly doji makes for a good reversal candle in a downtrend, it isn’t always found in one. Dragonfly Doji's are also found in periods of price consolidation, as well as uptrends, and are perceived as follows:
- Bullish Uptrend - Strong sign of possible Continuation to the upside
- Bearish (overextended) Downtrend - Sign of Possible Reversal. Depending on how overextended the dump/downtrend
- Market Consolidation (side-ways movement) - Bullish market sentiment, likely continuation to the upside.