Key Takeaways

• The dragonfly doji is a candlestick pattern that appears as a ‘T’ shape with a long lower shadow. It symbolizes a potential warning of a trend reversal at the bottom of a downtrend.
• The dragonfly doji pattern can provide powerful signals when used with other technical indicators.
• The appearance of the dragonfly doji alone is not a definitive signal. Traders should ensure that proper risk management is applied at all times.

What is a Dragonfly Doji?

A dragonfly doji is a candlestick pattern indicative of potential market reversal points. The doji dragonfly is particularly rare and significant when the open, high, and close prices align closely.

Characterized by its ‘T’ shape, it signals a struggle between buyers and sellers where the session ends with the market price returning to the opening level. This pattern suggests a potential shift in momentum as a sign of trend reversal at the bottom of a downtrend. Following a price advance, the dragonfly doji indicates that sellers were able to take control for at least part of the period, despite the price closing unchanged. This increase in selling pressure is seen as a warning sign for a potential price decline.

Key Characteristics:

The dragonfly doji is a single candlestick pattern that consists of three parts: a short upper shadow, a small body, and a long lower shadow.

1. Short upper wick – The short upper wick represents the high of the session where buyers tried and failed to push prices higher. The price eventually closed near the session open.
2. Small or no body – The body of a candle refers to the opening and closing price of the session. When the prices open and close at the same or similar levels, this results in the appearance of a small body or line near the top of the candle.
3. Long lower shadow – The long lower shadow, or wick, is perhaps the most unique and important characteristic of the dragonfly doji. Once the session begins, sellers initially gain control by pushing prices lower. But after reaching the low, buyers react swiftly and forcefully, driving prices back toward where they opened initially.

How to Identify the Dragonfly Doji Candlestick Pattern

To identify the dragonfly doji candlestick pattern in trading charts, you can follow these straightforward steps. The dragonfly doji typically appears after a price decline and can signal a potential price rise or as a sign of trend reversal at the bottom of a downtrend.

Step A: Candle size

• Look for a candlestick that has an average or larger than average size compared to the surrounding candles. This indicates significant trading activity and interest at certain price levels within the time frame you are analyzing.
• Why it matters: A larger candle suggests that the price was pushed significantly away from the opening level at some point during the candle’s creation indicating a strong interest in the asset.

Step B: Long wick

• Check for a long lower wick (or shadow) protruding to the downside. This wick should be significantly longer than the body, ideally making up most of the candlestick’s total length.
• Why it matters: The long lower wick shows that the prices were driven down during the trading period but then pulled back up to close near the open, indicating buying interest at lower price levels.

Step C: Small body

• Look for a small body that appears in the upper third of the candle’s total range. The body’s color is not particularly important, but it’s often either very small or nonexistent (a perfect doji), which means the open and close prices are virtually the same.
• Why it matters: A small body at the top of the candle’s range shows that after all the downward and upward movement, the price settled very close to the opening price, suggesting equilibrium between buyers and sellers.

Why is the Long Lower Shadow Important?

The long lower shadow of a dragonfly doji plays a crucial role in its interpretation. This shadow represents the price range from the open and close price to the lowest price of the session. The length of the lower shadow indicates the extent of the sellers’ control during the session and the subsequent comeback made by the buyers.

Here’s why the long lower wick is important:

Indication of rejection of lower prices:The long lower wick represents a period within the trading session where prices were driven down significantly from the open but then pulled back to close near the open.This is seen as the market rejecting lower prices, indicating that buying interest is present at these lower levels. It suggests that there was a shift from selling to buying pressure during the session.

Signals a potential reversal:The dragonfly doji can signal a potential reversal. Despite sellers pushing the price down, buyers managed to absorb the selling and push prices back up to near the opening level.This buying pressure is a key sign that the market sentiment may be shifting.

Strength of the bulls:The length of the lower wick can also be seen as a measure of the strength of the buying pressure. A longer wick suggests a stronger rejection of lower prices, which may indicate a more robust potential for a bullish reversal. It shows that buyers were aggressive enough to overcome the sellers and close the session near its high, after a significant push down.

Market Psychology Behind the Dragonfly Doji Pattern

The dragonfly doji pattern serves as a powerful symbol of psychological dynamics at play in the financial markets. This particular formation not only reflects a failed endeavor by bearish forces to maintain market dominance but also signals a potential price decline after a price gain or as a sign of trend reversal at the bottom of a downtrend.

At the heart of the dragonfly doji’s formation is a narrative of initial dominance by sellers, who drive prices downward during the trading session. Nevertheless, as the session draws to a close, buyers step in with enough force to elevate the price back to its opening level, capturing a moment of equilibrium and suggesting a possible transition from bearish to bullish sentiment. This dynamic encapsulates a moment of uncertainty and hesitation among market participants, reflecting the nuanced interplay of emotions and strategies that influence market movements.

Dragonfly Doji Psychology Visualized

For instance, consider a scenario depicted above, where the dragonfly doji appears on the weekly chart (on the left), complemented by a breakdown of daily candles on the right. This visualization reveals a week-long journey where prices dip significantly from Monday, reaching their nadir on Thursday, before a spirited recovery by buyers on Friday brings the prices back to the vicinity of Monday’s opening level. This sequence culminates in the formation of a dragonfly doji on the weekly chart, embodying a stark rejection of lower prices by the market.

Such a rebound from the lows back to the opening prices not only underscores the market’s repudiation of sustained lower valuations but also serves as a pivotal moment for traders. This signal of a potential change in market sentiment, from bearish to less bearish or even bullish, is a critical juncture that can influence trading strategies. 

Traders, recognizing the implications of this pattern, may see it as a precursor to a trend reversal, prompting them to reevaluate their positions in anticipation of possible upward momentum.

The dragonfly doji, therefore, is not just a pattern on a chart; it is a manifestation of the collective psyche of the market’s participants, offering insights into the shifting tides of sentiment and the psychological undercurrents that drive market dynamics.

What does Green Dragonfly Doji Candlestick Indicate?

A green dragonfly doji is considered a strong bullish reversal signal. This pattern appears green because the close price is higher than the open price, indicating that buyers were able to push the price up by the end of the session. The green color, coupled with the long lower shadow, suggests that buyers were in control for the majority of the session, managing to push the price up from the day’s lows to close near the open.

This strong buying pressure could indicate a potential shift in market sentiment and a possible upward price movement.

What does Red Dragonfly Doji Candlestick Indicate?

A red dragonfly doji, while still suggesting a potential reversal, does so with a bit less conviction than a green one. This pattern appears red because the closing price is lower than the opening price. After the market opened, sellers were able to push prices lower, but they were unable to maintain control. Although prices closed slightly below the open, the long lower shadow once again illustrates the power of the bulls to take back control, temporarily muting the downward move. 

Does it Matter If a Dragonfly Doji Candlestick is Red or Green?

While the color of a dragonfly doji can provide some insight into the power dynamics between buyers and sellers during the session, it’s not the most critical aspect to consider. Instead, the pattern’s overall context within the market and its position relative to other technical factors are more important.

Whether a dragonfly doji is red or green, the key takeaway is the long lower shadow and the small body, which indicates a battle between buyers and sellers as both parties attempt to gain traction. This could also occur after a strong uptrend, highlighting a pause and potential correction or reversal of the upward trend itself.

However, it’s essential to look for confirmation from subsequent price action and consider other technical indicators to validate this potential reversal.

Identifying the Dragonfly Doji in Real-Time Trading

Identifying the dragonfly doji in real-time trading is an invaluable skill across various markets, including stocks, forex, commodities, and cryptocurrencies. This pattern not only signals potential reversals but also provides insight into market sentiment, offering a strategic advantage in decision-making. By analyzing candle size, the presence of a long wick, and the characteristics of the candle’s small body, traders can effectively anticipate market movements and adjust their strategies accordingly.

For example, in early 2021, gold experienced significant price fluctuations. In January, the price peaked at $1,959.19 before tumbling down to $1,676.61 in March, marking a substantial decline. This movement highlighted gold’s volatility and its attractiveness as a trading asset. Amidst these fluctuations, the formation of a dragonfly doji indicated a shift in market sentiment. Following a downtrend, the appearance of this pattern suggested a bullish reversal, as it was preceded by buyer momentum strong enough to counteract selling pressure.

The resilience of gold prices, failing to hit the lows experienced in March 2021 again, and the subsequent upward movement after the formation of the dragonfly doji, confirm the reversal and signal a bullish sentiment.

The dragonfly doji’s effectiveness is enhanced by its context. Patterns appearing near key support levels, moving averages, or other significant technical points are more likely to signal true reversals. This is especially relevant in fast-moving markets like cryptocurrencies, where the dragonfly doji can serve as a critical indicator amidst the noise.

How Often Does Dragonfly Doji Candlestick Happen?

The Dragonfly Doji isn’t an everyday guest on your candlestick chart. Its occurrence is relatively rare as it only forms under specific market conditions where the open, high, and close prices converge at the same level, creating a long lower shadow. This rarity can make the Dragonfly Doji all the more significant when it does appear.

However, it’s essential to remember that its infrequency also means that you shouldn’t base your trading strategy solely on this pattern. Instead, consider it as one of many tools in your trading toolbox.

Chart Timeframes and Settings

The dragonfly doji is a versatile pattern that can be traded across various timeframes. Whether you’re a day-trader or a long-term investor, you’ll be able to spot this pattern on your chart, depending on your strategic approach and time horizon. Because the chart timeframe determines the amount of data represented by each individual candle, the dragonfly doji is usually more likely to occur on shorter timeframes. 

For short-term trades, you might find the dragonfly doji on intraday time frames, such as:

Hourly Charts	Shows the price action for a single hour.
30-Minute Charts	Shows the price action in half an hour intervals.
15-Minute Charts	Shows the price action in 15 minute intervals.
5-Minute Charts	Shows the price action in 5 minute intervals, which could assist in identifying micro price action at key levels.

These shorter timeframes can give you a more granular view of market behavior, but can prevent the trader from gaining a broader perspective of the longer-term trend.

On the flip side, if you’re an intermediate-term or swing trader, you might look for dragonfly doji patterns on 4-hourly and daily charts. These longer timeframes can provide a balance between short-term noise and long-term trends, giving you a broader view of the market.

And if you’re a long-term trader or position trader, you might analyze monthly or weekly charts to spot the dragonfly doji pattern. These charts reflect larger trend reversals, making them suitable for holding positions over several months to years.

Confirming the Pattern with Volume

OTC markets, such as Forex and cryptocurrencies, operate without the centralized oversight characteristic of traditional exchanges. Trades are conducted directly between parties, bypassing centralized platforms. This decentralized nature poses unique challenges for volume analysis, as there is no single source compiling all trade activity.

The absence of a centralized exchange in OTC markets means that volume data might not capture the entire market’s activity, potentially leading to misleading signals. For instance, volume indicators in the Forex market often reflect the activity of a particular broker or a consortium of brokers rather than the entire market. This fragmentation can dilute the efficacy of volume as a confirmation tool.

In contrast to OTC markets, centralized trading venues, such as stock exchanges and futures markets, offer a consolidated view of trading activity. These platforms facilitate the buying and selling of assets like stocks, commodity, and index futures, providing transparent and accurate volume data.

The availability of precise volume information in centralized markets enriches the analysis of trading patterns and trend confirmations. For example, the occurrence of a dragonfly doji candlestick pattern alongside a spike in volume can significantly bolster the reliability of bullish reversal signals in these markets.

Dragonfly Doji Example

To demonstrate how the pattern may come to life, let’s consider EUR/JPY. 

Leading up to the dragonfly doji, the EUR/JPY chart below exhibited a pullback towards a significant trendline support. This trendline had been established over a period, marked by connecting at least three significant lows, indicating a rising trend. The currency pair experienced a downtrend that led to a test of this trendline support, suggesting bearish sentiment in the market.

As the dragon doji was in the process of forming, price action temporarily broke below the trendline support, generating a sense of uncertainty. This breach was critical as it tested the bulls’ resolve and questioned the sustainability of the rising trend. The market seemed to be on the verge of a potential reversal or continued downtrend at this point.

In the month following the appearance of the dragonfly doji, EUR/JPY gained 4.31%. This significant upturn was a clear indication that the bullish forces had taken control, allowing the uptrend to resume. The strong bullish candle that followed served as a confirmation of the dragonfly doji’s reversal signal, validating the buyers’ newfound dominance in the market.

Managing Risk When Trading the Dragonfly Doji

Risk management is as important as an entry signal for any trading strategy. When trading the dragonfly doji pattern, it’s important to consider factors such as position sizing and stop-loss placement to prevent disproportionate losses. A common strategy is to set stop-loss orders below the pattern’s low for long positions. This protects against downside risk and helps to control potential losses if the price moves against the trade.

Given the dragonfly doji’s relative rarity and potential unreliability as a standalone tool, strong risk management is essential to handle the less common but potentially significant trading opportunities it presents. It’s important not to put all your eggs in one basket. Diversification is key to risk management, and traders should avoid overconcentration in positions merely based on the Dragonfly Doji pattern.

Besides position sizing and stop-loss placement, another important aspect of risk management is setting profit targets. Profit targets should be established based on risk to reward preferences coupled with other technical analysis tools. These call price targets need to be realistic and aligned with market conditions. Knowing when to exit a trade can be as important as knowing when to enter one.

After the appearance of a dragonfly doji candle on the FTSE 100 daily chart above, a trader could have placed a buy order with an entry point just above the candle at a level of 7460. The stop level could be placed just below the low of the dragonfly doji at 7370 (90 points away). If the trader wanted to use a risk reward ratio of 1-to-2 they would then set the limit level (the level at which the trade would close in a profit) 180 points away, at a level of 7640. 

Position Sizing and Stop-Loss Placement

Position sizing is the process of determining how much of your capital you’re willing to risk on a single trade. It’s a critical step in risk management that directly impacts your potential profit or loss.

• Basic principle: Never risk more than 1% of your total account balance on a single trade. For instance, with a $40,000 account, your maximum risk per trade should be $400 or less.
• Calculation: The position size is calculated based on the distance between your entry point and your stop-loss order, keeping in mind the 1% rule. 

The formula is:

• Position size= Account risk / trade risk per share
• Example: If the stop-loss is set $1 away from your entry point, and you’re willing to risk $100 on the trade, your position size would be 100 shares.

Stop-Loss Placement

A stop-loss is an order placed with your broker to sell a security when it reaches a specific price. It is an important tool for limiting potential losses on a trade.

For dragonfly doji patterns:

• Bullish setup: Place the stop-loss just below the low of the dragonfly doji. This protects against the downside while giving the pattern room to prove itself.
• Rationale: Using the other side of the dragonfly doji pattern as a reference for stop-loss placement leverages the pattern’s reversal prediction, minimizing potential losses if the market moves unfavorably.

Not setting stop-loss orders can result in substantial and sometimes unmanageable losses. The price reversal anticipated after a dragonfly doji may not always occur, leading to significant drawdowns if a trade is left unprotected.

Incorporating disciplined position sizing and strategic stop-loss placement when trading the dragonfly doji pattern is essential for risk management. By risking no more than 1% of your account on a single trade and using the pattern itself to establish stop-loss orders, you help minimize the large losses a single trade might produce. 

Setting Profit Targets and Trailing Stops

Setting profit targets and trailing stops is another essential part of risk management when trading the dragonfly doji. 

Profit Targets

Profit targets (limits) refer to the price level at which you plan to close your position to realize a profit. When trading the dragonfly doji, profit targets should be established based on risk/reward preferences or other technical analysis tools. Many times, traders will look at the distance to the stop loss and double it to arrive at how far away the profit target is placed. For every pip of risk, there are 2 pips of profit potential. This yields a 1 to 2 risk to reward ratio.

Trailing Stop Losses

Trailing stops are another useful tool for managing ongoing trade risks and securing profits. A trailing stop is a type of stop-loss order that dynamically moves with the market price. If you are in a bullish trade positioned long, a trailing stop will move higher as the market’s price moves higher. If the market’s price moves high enough, then the stop loss is moved to above the entry price practically locking in a profitable trade.

In the section ‘managing risk when trading the dragonfly doji’ we looked at the risk/reward ratio of buying a FTSE 100 contract with an entry price of 7460 and a stop loss at 7370 (90 points away).  Now, if the trader set a trailing stop with a distance of 50 points and prices moved in the traders favor to 7535 (75 points away), the stop would then move 50 points to 7420. If prices then continued to rally to rise to 7620, the stop would move to 7520. In essence, for every 50 point chunk the market advances, the stop loss advances 50 points too. This means that even if the price fell back to 7520, the position would then close in a profit.

Dragonfly Doji Trading Strategies

Various trading strategies can be employed when trading the dragonfly doji, depending on the trader’s objectives and risk tolerance.

These strategies range from simple price action techniques to more complex strategies involving multiple technical indicators.

Dragonfly Doji in a Downtrend

In a downtrend, a dragonfly doji can signal a potential bullish reversal. The long lower shadow suggests that despite initial selling pressure, buyers were able to push the price back up to the opening level. This indicates that buying pressure is starting to outweigh selling pressure, potentially leading to a price rise. However, it’s crucial to wait for confirmation from the next candle before making a trading decision.

Dragonfly Doji in an Uptrend

On the other hand, in an uptrend, a Dragonfly Doji can signal a potential pause of the current uptrend after a bull rally. A Dragonfly Doji in an uptrend on a long-term chart can also provide potential support and resistance zones that may be critical for a possible reversal of the primary trend. This is why  it can be essential to wait for confirmation from the subsequent candle before making a trading decision.

Pullbacks On Naked Charts

Trading pullbacks on naked charts is another strategy that can be used with the Dragonfly Doji. A naked chart is a price chart devoid of any technical indicators. In this scenario, the Dragonfly Doji can provide a visual confirmation of potential reversal points during pullbacks in an uptrend.

This can be particularly effective for traders who prefer a clean, minimalist approach to chart analysis.

Combining The Dragonfly Doji with Trendlines and Support Levels

The dragonfly doji can also be combined with trendlines and support levels to improve trade accuracy. Trendlines are lines drawn on a chart to represent the prevailing direction of price. Support levels, on the other hand, are price levels at which buying pressure is thought to exceed selling pressure, preventing the price from falling further.

When a dragonfly doji occurs near a trendline or support level, it can provide a stronger signal for a potential price reversal.

Let’s revert back to our EUR/JPY example. 

The dragonfly doji formed at a crucial juncture, right after the price had dipped below the trendline support. Its long lower shadow indicated that although the sellers managed to push the price down significantly, the buyers entered the market with force, driving the price up to close just below the monthly open. This pattern signified a strong rejection of lower prices and hinted at a possible change in market sentiment from bearish to bullish.

The EUR/JPY chart transitioned from a state of uncertainty and bearish sentiment, marked by a break below trendline support, to a robust bullish phase initiated by the emergence of a Dragonfly Doji. This pattern effectively signaled a reversal that was further confirmed by subsequent price action, illustrating the power of technical analysis in identifying key market turning points.

Trading the Dragonfly Doji with Moving Averages

The dragonfly doji can be traded with moving averages for trading pullbacks during uptrends. A moving average is a technical analysis tool that smooths out price data by creating a constantly updated average price. This can help you identify the general price trend and provide potential support and resistance levels.

When the dragonfly doji forms at the moving average, the pattern indicates it is respecting the moving average as a support level. The key to this strategy is to use a common moving average like a 20, 50, 100, or 200-period moving average.

Trading the Dragonfly Doji with RSI Divergences

Trading the dragonfly doji with RSI (Relative Strength Index) divergences can provide potential bullish reversal signals after downtrends. An RSI divergence occurs when the price forms a new low, but the RSI forms a higher low. This divergence suggests that while the price is making new lows, the underlying momentum is weakening, potentially leading to a price reversal.

When the dragonfly doji appears near the bottom of the second price low, it suggests bullish support is forming. If RSI is below 30, then a confirmed signal appears when the RSI rallies back above 30.

Trading the Dragonfly Doji with Fibonacci

The dragonfly doji can also be traded with fibonacci retracements for identifying potential reversal levels. Fibonacci retracements are horizontal lines that indicate where potential support and resistance levels are likely to occur. They are based on fibonacci numbers, a sequence of numbers where each number is the sum of the two preceding ones.

Common fibonacci retracement levels used are the 23.6%, 38.2%, 61.8% and 78.6%. Therefore, when a dragonfly doji forms near one of these retracement levels within an uptrend, it hints that the market is respecting that hidden level of support. As a result, the price typically rebounds to the next fibonacci level above it.

Trading the Dragonfly Doji with Pivot Points

Finally, trading the dragonfly doji with pivot points can be particularly useful in day trading. Pivot points are technical analysis indicators that provide levels of support and resistance which can be used to determine potential entry and exit points.

Pivot points are another form of hidden levels of support and resistance placed on the charts. The pivot levels are calculated based on the previous trading day’s high, low, and close price. There are a variety of distortions that traders apply to the calculation. One day trading strategy involves the use of Camarilla pivot points. Traders will use the S3 as a support zone within an uptrend. If a dragonfly doji appears at the S3, then it would hint that a bullish rally may develop.

Advantages of Trading the Dragonfly Doji

Trading the dragonfly doji comes with several advantages. Being a potential indicator of price reversals, this pattern can provide insights into market sentiment. It can signal a change in the balance of power between buyers and sellers, potentially alerting you to buying opportunities.

When the pattern develops near a zone of support, it can confirm that the market is respecting the support and prices may continue to rally.

Another advantage of the dragonfly doji is its versatility. It can be traded across various timeframes, making it suitable for different trading styles, whether you’re a day trader or a swing trader. Adding to the versatility, the pattern can provide specific levels to place a stop loss. For example, the long tail to the downside of the dragonfly doji offers a zone for traders to consider placing a stop loss. 

Furthermore, this pattern can be combined with other technical analysis patterns like RSI divergence to help confirm a potential change in trend to the upside.

Disadvantages of Trading the Dragonfly Doji

While the dragonfly pattern has its advantages, it also comes with a few drawbacks. One of the main disadvantages is its rarity. This pattern does not occur frequently, which can limit its usefulness as a standalone trading tool. Traders waiting for this pattern to appear might miss out on other trading opportunities.

Another disadvantage is the potential unreliability of the dragonfly doji as a sole trading signal. While this pattern can signal potential price reversals, it’s not always a reliable indicator on its own. It’s often necessary to wait for a confirmation candle to validate the pattern before making a trade decision. Or, use the dragonfly doji to help confirm other more bullish signals and technical patterns. By itself, the pattern can be misleading so look for context clues from other tools.

Common Mistakes and Pitfalls to Avoid

Trading the dragonfly Doji, a popular candlestick pattern, can be an effective way to gauge potential market reversals. However, even the most seasoned traders can fall into certain traps if not cautious. Here are some critical mistakes and pitfalls to avoid, along with strategies for hedging these statements.

1. Over reliance on the pattern:The dragonfly doji can be a powerful indicator, but treating it as the holy grail of trading signals won’t work. This overreliance might obscure other critical market dynamics or signals, potentially leading to skewed trading decisions.

• Solution: Employ it as part of a diverse set of analysis tools. Combining it with trend analysis, other candlestick patterns, or technical indicators can provide a more comprehensive market overview and lead to more informed decisions.

2. Ignoring the need for confirmation: The anticipation of a price reversal solely based on a dragonfly doji appearance, without waiting for subsequent confirmation, can result in hasty and often regrettable trading decisions.

• Solution: Wait for the next candle(s) to confirm the direction implied by the dragonfly doji. This confirmation could significantly reduce the risk of false signals and enhance the success rate of trades.

Bullish vs Bearish Dragonfly Doji Candlestick Pattern

The bullish dragonfly doji has the same shape as the bearish version, but the difference stands within the context of the current trend.

The bullish dragonfly doji pattern is found after a downtrend in prices. The trend continues lower, but is abruptly reversed to higher prices.

On the other hand, the bearish version of the dragonfly doji candlestick pattern appears after a sustained rally. An immediate price decline and swift rally shapes the long shadow. This suggests that sellers are interested in the higher prices and the asset struggles to rally. Both doji patterns provide a clue about the buyers or sellers interest in the asset.

Dragonfly Doji vs Gravestone Doji

The dragonfly doji and the gravestone doji are similar Japanese candlestick patterns but shaped in the opposite direction. Both patterns are similar to pin bars in their construction and the market indicators they provide. However, the primary difference between these two patterns lies in the position of the long shadow. The dragonfly doji has a long lower shadow, indicating a potential bullish trend reversal. In contrast, the gravestone doji has a long upper shadow, suggesting a potential bearish reversal.

Both the dragonfly doji and the gravestone doji have almost no difference between the opening and closing prices, resulting in little to nobody on the candlestick. Despite the lack of a body, both patterns signal that a significant price range appeared during their formation.

Dragonfly Doji vs Hammer

The dragonfly doji and the hammer have a similar appearance from a distance. Both patterns indicate a potential price reversal but differ slightly in their construction. 

A hammer has a larger body near the high of the session. In contrast, a dragonfly doji has no or a very small body at all, indicating that the open and close prices are near similar price levels. 

Both patterns have a relatively long wick protruding to the downside. However, the dragonfly doji’s wick may be slightly longer in an apples to apples comparison.

The long wick’s in the patterns indicate that sellers were initially in control but buyers were able to push the price back up. However, the dragonfly doji suggests even stronger bullish pressure due to the lack of any bearish resistance. Both patterns are considered bullish, especially if they form near a support level.

However, it’s important to note that the Hammer is generally considered a more common pattern than the dragonfly doji. The dragonfly doji’s rarity can make it a more significant signal when it does appear. However, this also means that it might not appear as frequently as the hammer pattern. 

Dragonfly Doji vs Hanging Man

The dragonfly doji candlestick pattern and the hanging man appear, at first, to be quite similar patterns. Both patterns are single candle patterns. Both patterns have the head near the candlestick’s price high.

The main differences between the patterns are where they appear within the larger context of the trend. Also, the length of the shadow will be much longer in the dragonfly doji relative to the hanging man candlestick pattern. Lastly, the size of the head on the dragonfly will be even smaller than the head on a hanging man.

Dragonfly Doji vs Long-Legged Doji

The dragonfly doji and the long-legged doji are both characterized by their long lower shadows, indicating a strong buying pressure. The long-legged doji differs from the dragonfly doji in that it also has a long upper shadow. This indicates significant price movement and volatility within the session.

The dragonfly doji suggests that sellers were initially in control but buyers gained strength and pushed the price back up to the opening level. On the other hand, the long-legged doji displays a struggle between buyers and sellers with no clear winner.

While both patterns represent indecision, the location of the dragonfly doji at the end of a downtrend or at a support level may offer a bullish reversal cue. In contrast, the long-legged doji implies continued indecision and requires further confirmation from subsequent price action.

Dragonfly Doji Pattern vs Doji Star Candlestick Pattern

The dragonfly doji and doji star are a subcategoary of the doji candlestick patterns. Doji patterns require the open and close prices to be similar. Therefore, the main difference is the location of the head and length of the wicks.

The location of the head for the dragonfly pattern appears near the high with the lower wick being extremely large. The doji star candlestick pattern will have wicks protruding from both sides of roughly the same size. As a result, the pattern creates a “+” plus sign.

Dragonfly Doji Pattern vs Pin Bar Candlestick Pattern

The dragonfly doji and the pin bar candlestick pattern are very similar in structure and size. Both patterns have a long wick. Both structures have a small or no head near the top of the candlestick pattern.

The main difference between the dragonfly doji pattern and the pin bar is the size of the head. The dragonfly doji will have virtually no head as the closing price is nearly the same as the opening price. On the other hand, the pin bar has a very small head too, but with the closing price being very slightly farther away from the opening price. To me, this difference is negligible and a trader should treat them as one in the same.

Dragonfly Doji vs Spinning Top

The dragonfly doji and the spinning top are two Japanese candlestick price patterns that indicate market indecision, but they differ in their construction and interpretation. A spinning top candlestick has a small real body with almost equal length upper and lower shadows, indicating indecision in the market. Like the dragonfly doji, the color of the Spinning Top candlestick does not significantly matter since the open and close prices are very close to each other.

The spinning top does not provide a specific trading signal with entry or exit points as the pattern is interpreted as indecision.The spinning top indicates that neither bulls nor bears could establish control during the session, as evidenced by the small real body and relatively equal shadows.

In the context of a trend, a spinning top can signal potential reversal or continuation, but it does not determine the direction by itself and should be interpreted with caution. 

On the other hand, the dragonfly doji represents a potential trend reversal, especially when it gaps above a previous hollow candle or below a filled candle, indicating a possible change in market sentiment.

FAQ

Is the dragonfly doji bullish or bearish?

A dragonfly doji is considered bullish after a downtrend due to the long lower shadow. After a prolonged uptrend, the dragonfly doji could be bullish or bearish.

How reliable is a dragonfly doji candlestick?

By itself, the dragonfly doji is not a great signal. Spotting the dragonfly doji near other support levels or using it in conjunction with other indicators improves its reliability.

When is the best time to trade using dragonfly doji candlestick?

The best time to trade using a dragonfly doji candlestick depends on the market context in which it appears. A dragonfly candlestick doji can appear in volatile market conditions resulting in the long wick to the downside. Therefore, volatile market conditions tend to produce enough dislocation between buyers and sellers to generate follow through after the pattern develops.

Is a dragonfly doji a uptrend sell signal?

It can be a sell signal, especially if it appears near a resistance level. The long lower shadow suggests sellers are trying to take over and having a little success. After a prolonged uptrend, the pattern suggests the mood of the market may be changing from up to down.

What are other types of doji candlestick patterns besides dragonfly doji?

Other doji patterns include long-legged, gravestone, double doji, 4-price, and neutral doji.