Every candle on the chart of financial assets reflects participants’ activities during any particular period. Traders who can identify those specific patterns and candles can catch precious entry and exit positions or accurate entry positions. Dragonfly Doji is a standard pattern that smart traders follow to generate trade ideas.
However, trading with candlestick patterns involves particular skills to reduce loss and accuracy in trading. This article is about the popular pattern Dragonfly Doji. We describe trading techniques with chart attachments besides explaining the pattern.
What is Dragonfly Doji
You can define it as a version of the “Doji” candle with long wicks on the lower side of the candle body. Either the body is red or green, it doesn’t matter to define Dragonfly Doji. An ideal candle of this type has a large wick at any specific side of the body. It often occurs at the finish line of any trend signaling reversal possibilities, which signals a continuation of the current trend depending on the market context and other fundamental bases.
Dragonfly Doji has no upper wicks; the wick on the downside will be much larger than traditional Doji candles. Opening and closing prices will be the same, or a tiny change is acceptable during that candle formation. Many sellers enter the market, so the price declines to the low, then buyers push back the asset price near the opening of that candle period.
Usually, a bearish surge that ends up near the same as the opening price is a Dragonfly Doji candle pattern. A trim wick on the upside is acceptable. Otherwise, the opening price and the high during that period are the same. The inverse type of this type of candle is the gravestone Doji.
How to trade with a Dragonfly Doji pattern
This candlestick reflects confusion among participants during any specific period. It signals upcoming bullish movement when it takes place at the finishing of any downtrend. In most cases, investors wait till the next candle takes place. Meanwhile, when you mark a Dragonfly Doji near the ending of an uptrend.
When you see this pattern formation near an expected finish line of the current trend, mix that information with other technical tools and indicators such as support-resistance levels, momentum and volume indicators, etc.
Wait till the next candle completes formation and combine your choosable technical or fundamental info with the market context to generate potential trade ideas. It is typically a candlestick that signals an upcoming bullish reversal appearing below a downtrend.
A short-term trading strategy
Our short-term strategy uses support resistance levels beside Dragonfly Doji candle formation to determine profitable trading positions. You can use this technique on any financial asset that contains sufficient volatility.
This strategy works fine on any financial asset in any time frame; meanwhile, a 15 min chart is recommendable. Mark supports resistance levels from higher time frame charts from H4 or D1 charts. We consider remarkable levels, including weekly and monthly opening, closing, high/low, historic support-resistance level, etc.
Bullish trade scenario
When price reaches near any support or essential level that you mark at higher time frame charts, seek the dragonfly Doji candle after reaching the level. Observe the reaction on that specific level when you see the support level working, so the price starts to pull back and start moving upside place a buy order.
Put an initial stop loss for that buy order below the current support level. You can continue the order till the next support-resistance level if any breakout occurs. Meanwhile, the profit target will be below the nearest resistance level.
Bearish trade scenario
This candle typically generates a bullish reversal at the end of any downward. Meanwhile, when it fails, that is a possible downtrend. So seek the Dragonfly Doji below any resistance level. Observe the next candles when the price declines back and can’t break the resistance and place a sell order.
The initial stop loss will be above the current resistance, and the first profit target will be above the nearest support level.
A long-term strategy
In our long-term strategy, we use reading from a popular momentum indicator moving average convergence/divergence (MACD) besides using this candle type to generate trade suggestions. Mark the candle near any possible downtrend ending, then check on the MACD window for confirmation before making any entry or exit.
It typically generates bullish trade ideas; in some cases, this candle fails, which declares a possible upcoming declining asset price. This method suits any timeframe, but the D1 chart is recommendable.
Bullish scenario
When you see a dragonfly Doji near the finish line of any downtrend check:
- The blue line crosses the red line on the upside at the MACD indicator window.
- Both signal lines continue to move up to cross or remain above the middle (0.0) line of the MACD window.
- Green histogram bars take place above the middle (0.0) line.
Entry
Match the market context above conditions above, then wait till the current candle completes formation. Place buy order.
Stop loss
The stop loss will be below the Dragonfly Doji candle and the recent low of the downtrend with a buffer of 10-15pips.
Exit
Close the buy position when:
- The blue line crosses the red line on the downside of the MACD window.
- Red histogram bars take place below the middle (0.0) line.
Bearish scenario
When the dragonfly Doji fails, the next candle is a bearish candle with a large body that you can consider a bearish signal. You can place a sell order after the next bearish candle with a stop loss above the Dragonfly Doji candle. Before placing any sell order, check the bearish crossover (blue crosses below red) and red histogram bars below the middle line of the MACD window.
Close the sell position when green histogram bars exhibit above the middle line, and bullish crossover occurs on the MACD window.
Pros and cons
| Pros | Cons |
| You can make frequent trades depending on this pattern. | This pattern often fails. |
| This pattern works fine on any tradable financial asset. | Requires sufficient skills to identify and trade with this pattern. |
| This pattern works fine on any time frame chart. | Sometimes confusion comes for fake high/lows of lower time frames. |
Final thoughts
Finally, it’s okay to participate in long positions using this pattern. Meanwhile, it often involves complications to make sell positions using this pattern. We suggest avoiding trading with this pattern during any trend-changing economic event.
