Dragonfly doji is a single candlestick doji pattern that indicate possible trend change or reversal of existing trend.Dragonfly pattern works better in bullish trend reversal. Reliability of this pattern is moderate. According to Thomas Bulkowski’s ,(author of Encyclopedia of Candlestick Charts ) dragonfly doji reversed trend 50 percent of the time and 50 percent time indicate indecision.
Formation of dragonfly doji:
- Long lower shadow: this doji has a long lower tail. Higher the tail is better. The lower shadow indicates that at the beginning of the day there was very strong selling pressure from the bear. Stock went down hardly in response to selling pressure. After that new buyers came in the market, they pushed the price up to the opening price or close to the opening price. That’s why the big long tail is formed in this pattern. This long tail in the downtrend indicates the possible trend reversal or weakening of the downtrend as price came back to the opening price.
- Color: body of the dragonfly doji can be any either red or green.
- Open close: open close of this doji is close to each other. That means real is small or very small.
- Support or resistance: this candle indicate reversal in the support line, but in the resistance line this could be reversal or indecision
Trade setup for Bullish dragonfly doji
Dragonfly doji can be bullish or bearish. But this pattern works better in bullish reversal. This is a chart for amazon that shows a beautiful bullish dragonfly doji in the small downtrend.
Trade entry: trader should entred into the trade next day after confirmation is occurred. In the amazon chart, entry into the trade are shown by the blue line. Trader should get in to the trade after price breached the above of the dragon fly doji and hold the stock until price reached target of the trader.
Trade exit or stop loss: Stop loss of this pattern is below the low of the long tail of the dragonfly doji. yellow line in the above chart indicates the exit point or stop loss of the trade. Stop loss is fixed below the yellow line or low of the dragon fly doji because if price breached the low of the long tail that means downtrend is resumed again and new traders will join the downtrend and stock will go further down.
Bearish dragonfly Doji
This is is a google chart for bearish dragonfly doji in 2014. After a short rally, a dragon fly doji is appeared in the chart. This dragon fly doji is appeared in the long term resistance line of the chart. That makes this bearish dragon fly doji potent for downside move. In the chart we saw how stock broke down to the down side after this doji appeared.
Bottom line :
Dragonfly doji is a doji candlestick that works better in bullish reversal, but sometime this doji pattern also good bearish reversal pattern with the right position of doji. This doji candlestick should use with other technical indicators for good results. Secret of this pattern is right position of doji with proper use of technical analysis.
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