The dragonfly doji is a Japanese candlestick pattern that acts as an indication of investor indecision and a 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.
- A dragonfly doji is a candlestick pattern described by the open, high, and close prices equal or very close to each other, while the low of the period is significantly lower than the former three.
- This creates a "T" shape that is easily identified by technical traders.
- The appearance of a dragonfly doji after a price advance warns of a potential price decline. A move lower on the next candle provides confirmation.
- A dragonfly doji after a price decline warns the price may rise. If the next candle rises that provides confirmation.
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.
A doji is a name for a session in which the candlestick for a security has an open and close that are virtually equal and are often components in patterns. Doji candlesticks tend to look like a cross, inverted cross, or plus sign. Alone, doji are neutral patterns that are also featured in a number of important patterns. A doji candlestick forms when a security's open and close are virtually equal for the given time period and generally signals a reversal pattern for technical analysts.
In Japanese, doji means "blunder" or "mistake", referring to the rarity of having the open and close price be exactly the same.
What a Dragonfly Doji Indicates
When it forms at the bottom of a downtrend, the dragonfly doji is considered a reliable indication of a 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.
The dragonfly doji pattern doesn't occur frequently, but when it does it is a warning sign that the trend may change direction. Following a price advance, the dragonfly's long lower shadow shows that sellers were able to take control for at least part of the period. While the price ended up closing unchanged, the increase in selling pressure during the period is a warning sign.