The dragonfly doji is a Japanese candlestick pattern and acts as an indication of investor indecision and possible trend reversal. It is relatively easy to spot in a candlestick chart due to its unique "T" shape, which is the result of a trading day that opens on a downtrend and then reverses in time to close right near the opening price.
The body of a candlestick is equal to the range between the opening and closing price, while the shadows, or "wicks," represent the daily highs and lows. In the case of a dragonfly doji, the opening, closing and daily high price are all approximately the same. Such a pattern can only occur when the market trades down and then reverses but does not move above the opening price.
Why does the price only reverse enough to reach the daily opening level? Likely, it is because investors are neutral, no longer believing in the downtrend that prevailed in the early trading hours but also not sure the security has any real upward potential.
What a Dragonfly Doji Indicates
When it forms at the bottom of a downtrend, the dragonfly doji is considered a reliable indication of trend reversal. This is because the price hit a support level during the trading day, hinting that sellers no longer outnumber buyers in the market. If the security is considered to be oversold, which may require the assistance of additional technical indicators, a bull movement may follow in the days ahead. This may be a chance for additional entry points, especially if the market has a higher open on the following day.