All posts in "Technical Trading"

Dragonfly Doji – Types of Doji Candlestick

By Krisha Aranha / September 15, 2019

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 ).

Labeled Components of a Dragonfly Doji Candlestick

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. 

Phase 1 of a Dragonfly Doji

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). 

Dragonfly Doji upon candle close
Phase 2 of a Dragonfly doji getting bought up

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 $5they 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. 

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Gravestone Doji – Types of Doji Candlestick

Recall from our last post – A Doji Candlestick, while informative in structure, is of little significance without context. While this is true, there are a few types of doji candlestick that even without context, pose as great price forecast indicators. One such candlestick is the Bearish Gravestone Doji.  

Gravestone Doji – A Bearish Candlestick

The Gravestone Doji is a bearish doji candlestick and, within the right candlestick patterns, is often viewed as a reversal candle. This type of doji is spotted as an upside "T" candlestick on a chart. The  price breakdown of the gravestone doji suggests a complete sell-off of a once Green candlestick (Refer to the "High" in Image). Essentially wiping off any price gain the candlestick may have had. (refer to image)

Gravestone Doji - Candlestick Open, Close, High, Low

The Gravestone Doji suggests that the bears took the bulls down at the very last moment. Despite having the initial pump (refer to high), the bulls couldn't hold price past the candlestick Open. The gravestone doji is indicative of a massive bear victory.

A Gravestone Doji In Perspective

To put it into perspective, here’s a quick dissection of the Gravestone Doji. If you refer to Image 1, you’ll notice the candles opened at $1. The bulls swiftly pushed it up to $5. A push to the upside, without as much as a tick to the downside, is quite a feat. The initial bullish momentum clearly dwarfed the bear effort. 

Gravestone Doji playing out
Gravestone Doji getting sold into

However, as the candle played out (refer to image 2), bears started to sell into the candlestick. The selling pressure got to a point where the price was back to $1 - back to the opening price. The candle got sold into completely until the candle closed.

Note how this candlestick Opened and Closed at the same price, despite the magnitude of the initial bullish effort. Such price action usually renders a Gravestone Doji. 

Gravestone Doji upon candle close

Trading The Gravestone Doji

A gravestone doji could be found under different market contexts. Such as during bull rallies, market consolidations, as well in market dumps. Regardless of context, the Gravestone Doji remains a bearish candlestick.

The Gravestone Doji is analyzed as such when found under the following context:

  1. Bull Rally - It takes conviction from the bulls to sustain a rally. However, a gravestone doji in a bull rally suggests the bears won out. Hence, conviction from the bulls are wearing off. The doji is viewed as a potential reversal candle in this context. 
  1. Bear Dump - Severe price dumps tend to cause panic selling. Wherein, retailers are looking for the next best opportunity to sell their bags. Hence, when price bounces even slightly, traders sell into it. This price action is likely to render a gravestone doji, and is a sign of continuation.

  2. Market Consolidation - This isn’t always common. However when it occurs, it implies strong bearish market sentiment. The gravestone doji is viewed a sign of bearish sentiment and dominance.

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Doji Candlestick – Types of Doji Candlestick Patterns

The first step toward becoming a professional technical trader, irrespective of market (cryptocurrency, forex, traditional etc), is to understand price action through Candlestick Analysis. In particular, the various types of Doji Candlestick. Knowing this would give you an edge on forecasting market reversals and market sentiment like a professional. Additionally, it will keep you on the right side of the market - the profitable side! 

Candlestick Analysis - A Beginners summary

To better grasp the different types of candlesticks, like the doji candlestick, let’s start with the basics:

The Anatomy of a Candlestick - A candlestick has 4 components (refer to Image - Candlestick Components - assume its a 1D candlestick):

  1. The Open: The price at which a crypto/stock starts the day at 
  2. The Close: The price at which  a crypto/stock ends the day at 
  3. The High: The highest price a crypto/stock hits during that day
  4. The Low: The lowest price a crypto/stock his during that day
Candlestick Analysis - How to read a candlestick

The four components of candlestick chart analysis

The Open and Close make up the thick part of the candlestick, known as the Body. Whereas the High and Low make up the thin parts, known as the Shadows (some call it the Wick). Together they form a candlestick.

Each candlestick plays out over a specific time span, depending on what timeframe you’re looking at. Example: A candlestick on the daily chart is the open, close, high and low within the last 24hours. I.e each candlestick represents ALL the price action that took place during a 1 Day time span. 

TradingView Tip: If you're wondering what time each candlestick begins, simply hover your mouse on the candle, and look out for the timestamp on your x-axis.

What is a DOJI Candlestick?

In a “Doji Candlestick”, the Open and Close price are the same (refer to image "Doji Candlestick"). If the difference in the Open and Close price are within a few ticks of each other, the candle may still be identified as a Doji. 

Logically, the doji candlestick is viewed as a tie between the bulls and bears. It's a representation of uncertainty and indecision. Hence, when a doji candlestick is printed in the middle of rally (or dump), it could signify a potential trend reversal. 

Remember, price rallies and dumps need conviction to continue, and a doji candlestick is counterintuitive to that.

4 Types Of Doji Candlesticks

There are 4 types of doji candlesticks. All of which have bullish or bearish implications. This depends on whether the doji is found in an uptrend, or downtrend. 

The 4 types of Doji's are as follows: 

  1. The Common Doji –  A Neutral Candle suggesting a tie between bulls and bears ( image 'Doji candlestick')
  2. The Gravestone Doji – A Bearish Doji Candlestick. A good reversal indicator in an overextended uptrend
  3. The Dragonfly Doji   – A Bullish Doji Candlestick. A good reversal indicator in an over-sold Bear dump/downtrend.
  4. Long Legged Doji - A Bullish or Bearish Doji Candlestick, depending on whether its found in an uptrend or downtrend. 

    Note that doji candlesticks are commonly observed as Reversal Candles when found on over extended bull rally, or an oversold downtrend.

Why are Doji's known as Reversal Candles?

Doji candles signify tired trends when found in the middle of an uptrend or downtrend. As mentioned above, rallies and dumps need conviction to continue, and a doji candlestick is counterintuitive to that. They represent a tie between bulls and bears. 

However, a tie (doji) doesn't necessarily have to imply a reversal. It could also imply a short pause in the underlying trend, or a 'soon approaching' reversal. This is where the trader heeds caution, and looks for follow-up price action to come up with an informed hypothesis. 

Usually, doji's make for good reversal indicators when found on overextended rallies, or oversold dumps. When found in the early stages of a trend, the doji candlestick is unlikely to mark a reversal. 

A good example of a Bearish Reversal Doji  was in BTC's overextended Bull Rally. A Bearish doji candlestick was spotted on the Daily BTC/USD chart on Dec 18th, 2017 (refer to image below). This was during BTC's mega bull rally to $20K back in 2017

Doji Candlestick on 1Day BTC/USD chart on December 18th 2017

A (1 Day) Doji Candlestick marking a reversal point on BTC/USD on December 18th 2017

Identifying Candlestick Patterns

Each candlestick, including a doji candlestick, is akin to one piece of a puzzle. It’s only a hint at the bigger picture. To get a better idea of the picture, you’ll need to analyze several candlesticks together. You need to identify a candlestick pattern.

While there are such things as Bullish candlesticks, Bearish candlesticks, Reversal candles etc. Identifying these candles are of no significance without any context.

The context comes from recent price action around such candles. For example, "was there a preceding rally or dump?" and "was it over extended?". Such pieces of information are only derived from analyzing a set of candlesticks together - Analyzing a Candlestick Pattern for bullish or bearish signals.

Identifying a doji candlestick within a candlestick pattern can help solidify price forecast tremendously, and keep you prepared for any adverse price moves in the market. 

For the sake of brevity, we'll discuss the various types of Bullish and Bearish Candlestick patterns, as well as various Bullish and Bearish Doji Candlestick in upcoming posts.

Pieces Of The Candlestick Puzzle 

Candlestick analysis is like solving a puzzle. Identifying a Doji candlestick is like finding a piece of the puzzle that grows more pivotal to the whole picture, the more puzzles you add to it. A Candlestick Pattern is akin to solving a third of the puzzle and getting a good idea of what the end picture holds. 

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The Animal Spirits in Crypto – Irrational Exuberance & Crypto Bubbles

Three times.

Three times this week I was asked the following question:

“Why are the prices still low when the fundamentals seem so strong?”

Fortunately, there’s a two-worded answer:  Animal Spirits 

It’s not a simple answer – not by a long shot. But it is, indeed, a short answer that encompasses the intricacies of greed, fear and human behaviour.

To understand this, let’s first question if prices are really low? Or are we simply benchmarking prices at their all time high  –  prices that were guided by the animal spirits of crypto investors.

John Maynard Keynes, a famous economist, used the term “Animal Spirits” to describe the irrational decisions investors make in an uncertain environment.

But today the phrase “Animal Spirits” seems to be used primarily in environments of high confidence.  Confidence & optimism, however, aren’t the only byproducts of Animal Spirits. Fear & pessimism play an equal share in the phenomenon.

Irrational Exuberrance. Irrational Anxiety

Should it not then make sense that irrational confidence be followed by equally irrational fear? Optimism that drove prices to exuberant highs should follow with a similar anxiety that would drive prices to irrational lows. For if it does not follow, eventually at least, then perhaps the optimism was not irrational after all. In a way, this explains the driving mechanism of “bubbles” (and also why it’s claimed impossible to forecast)

Nobel Laureate winner Robert Shiller defines a ‘speculative bubble’ in his book ‘Irrational Exuberance’ as follows:

 I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, and, in the process, amplifies stories that might justify the price increase…”

Shiller akins a bubble to that of an epidemic virus – something that can “catch” and get out of control very easily. Similar to their virus counterparts, speculative epidemics can result in massive losses when culminated with doubt, fear and anxiety.

But the key question here is: Are we already past the irrational anxiety?  Or is it yet to play out?

Recurrence of Epidemics . Reflating of Bubbles.

Interestingly, Robert Shiller makes sure to emphasise that “speculative bubbles” don’t simply burst and disappear. Rather, they tend to inflate and deflate in accordance to the accepted narrative.

A viral epidemic can reappear if a new environmental factor reignites the contagion rate.

Similarly, a deflated speculative bubble can “re-inflate” if a new narrative is strong enough to ignite the animal spirits of investors.

Ah, but this poses yet another tricky question for the crypto space.  Have we already “re-inflated”? After all, prices did surge to an all-time-high of $1000 before deflating to $200.

Have we already re-inflated?!

Is it possible that we see another epidemic spark the animal spirits to a point irrational confidence?

A Great Time To Be Alive

A strong argument can be made in favour of another speculative bubble – a larger one. In his definition of a “speculative bubble”, Shiller goes on to explain what follows the price increase in a speculative bubble:

...The price increase brings in a larger and larger class of investors, who, despite doubts about the real value of the investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement”

The crypto market allowed for a new class of investors to be first entrants. They consisted mostly of people who were young & technologically sophisticated. But they were by no means the “large class of investors”. Those are yet to come in mass.

Already we hear  reports of new & larger entrants into the market. Will their success draw the envy of other institutions? And will that, in turn, lead to an environment of overconfident gambling and exuberance that we have seen in the past?

Only time will tell. But one thing is certain, never before have we seen events play out at this rapid of a pace. Ahh, what a time to be alive.

Related Readings:


The Myth Of The Rational Market - A history of risk, reward & delusion by Justin Fox

Irrational Exuberance by Robert J Shiller

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You can get both of these books for free on Scribd:  Simply use my invite link.

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3 Reasons Why You’re Getting Wrecked In Crypto & How To Fix It

Why Am I Writing This?

I usually refrain from posts like these. But recent discussions have made me wonder if there's a increasing lack of maturity in our community. I'm seeing a lot of posts on how much money people have lost and how they are "out" etc etc. To each their own – but I figured I'd share some of things I've learned in my journey thus far. 

1) You’re a victim and you don’t know it

We are ruled by our emotions. Almost every single buying decision we make is an emotional one. News sites, advertisers, salesmen and pro-traders all understand this very well –– and they use it against us. The question is: Do you understand this about yourself?

Last week the narrative was:
“Ethereum scaling issues, ICOs are dumping etc etc”.

This week there was a push for
“Breakthrough in Ethereum Scaling! Novo calling the bottom!”

I hope you see a pattern here. Think back to last year:  
“BTC mempool, BTC can’t get their shit together, China banning exchanges!”

A  good salesman uses emotion to make a great sale. Similarly, a good trader will use emotion to make a good buy (at the bottom). He’ll then use emotion to make a good sell (at the top). 

In a way, you can’t help but appreciate the art of it all. But do not be a victim to this. Your emotion is the sword they wield when they attack. But it’s your sword. You can keep in check.

​​​​How To Fix It:  Know thy enemy & know thyself.

I spend most of my time on the fundamentals/technology in this space. But that hasn’t stopped me from learning about how traders think & how market cycles work. I have read over 10 books on market psychology, trading mindset and market cycles/crashes. Does this make me a pro-trader? Absolutely not – but it does arm me with knowledge that keeps me from making bad decisions. 

So pick up some books/tutorials on the trading psychology, market cycles etc. If you have money invested, you owe it to yourself to spend time learning some of the basics. This doesn’t mean you have to become a trader yourself. This will simply help you become more aware of what’s happening around you

2) You’re trading and you don't even know it 

Many of us think that we are “investing” – but in truth, our behaviour leans closer to that of a trader.

“Woah..woah… I hate Technical Analysis! I don’t believe in that crap”

News Flash: You don’t need to be using TA to be trading. Here are some signs that suggest you are trading without realising: Are you making your buying & selling decisions based mainly on the price?  Are you trying to time the tops & bottoms to increase your stack? Yes? You’re a trader.

We’ve all heard the saying: “96% Of Traders Lose Their Money”. So the odds are already against you – but imagine being a trader and not even knowing you are one.  It’s like walking into a Ice Rink with soccer sneakers.

The truth is that most of us in this space behave like traders – and we don't even know it.

To be an investor, you need to speculate on the direction, fundamentals & adoption of the technology.

A trader on the other hand, mainly speculates on the direction of the price (and may use short-term fundamentals to strengthen his thesis) But since very few of us understand the fundamentals, it’s easier to speculate on the price.

How To fix this?

  1. If you’re not interested in trading – and “in it for the technology” – then it’s time to start living up to the claim. Before you invest your money, invest your time to learn the underlying fundamentals. You don’t need to learn it all. Start with Bitcoin & Ethereum.  ​You can refer to my Blockchain Analogies page for simple explanation to various concepts

  2.  Realise and accept that you’re trading – and it’s what you enjoy. Trading is a competition/game. You’re going to keep losing if you don’t even know you’re playing. Learn “how” to trade – start with the basics, and start small.
     

Again, I understand that it’s a struggle to find good resources, so let me know you need help to find something specific. I’ve read a lot of great books, and a lot of shitty ones as well.

3) You are forgetting what this space is all about

It seems like we’re rapidly diverging from the ideology that gave birth to this space: Decentralisation. Most of us are focussed on the upcoming ETFs and the scaling issues of Bitcoin and Ethereum. Are we really excited for a financial tool that will allow for further centralisation and possible manipulation? Isn’t that precisely what we wanted to get away from?

“Oh but we don’t scale enough yet for adoption, we need this asap”

How To Fix It?  
Think back to why you really entered this space. Was it the ideology? Or the money? Make your decisions accordingly. But try not to get caught on the fence.

Final Thoughts

I'll end my rant here, but the takeaway is this: If you're playing the game, it's important to know that you're playing. And if you're playing – you better get good at it. If not, just stay in the sidelines (aka: buy & hodl)

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