What is a Dragonfly Doji
A Dragonfly Doji is a type of candlestick pattern that signals indecision among traders. It's formed when the security's high, open, and close prices are the same. The long lower shadow suggests that the forces of supply and demand are nearing a balance and the direction of the trend may be nearing a major turning point. For example, the Dragonfly Doji in the image below could signal a bullish reversal.
BREAKING DOWN Dragonfly Doji
A Dragonfly Doji pattern is a relatively difficult candlestick pattern to find, but when it is found within a defined trend, it is often considered a reliable signal that the trend is about to change direction. Often times, traders realize that the price was sold down to unjustifiably low levels so they send the price back up to where the stock opened. The close near the day's open suggests that demand is again starting to outweigh supply moving forward.
The Dragonfly Doji is similar to the Long-Legged Doji and the Hammer candlestick patterns. The key differences are that the Long-Legged Doji has an upper shadow and the Hammer has a difference between the open and closing prices. That said, many traders will take some liberties when identifying Dragonfly Dojis by allowing small gaps between the open and close prices.
The opposite of a Dragonfly Doji is a Gravestone Doji, which occurs when the low, open, and close prices are the same. Often times, the Gravestone Doji occurs at the top of a bullish uptrend and could represent the start of a bearish reversal. And, the standard Doji - a cross with an equal distance between the high, the low, and the open and close - indicates more indecision than the Dragonfly Doji.
Using the Dragonfly Doji
Dragonfly Doji patterns with a longer lower shadow tend to be a greater indicator of an upcoming reversal since the bulls were forced to post a stronger recovery from the lows for the period.
The Dragonfly Doji works best when used in conjunction with other technical indicators, especially since the candlestick pattern can be a sign of indecision as well as an outright reversal pattern. A Dragonfly Doji that appears on a high volume day might be a more reliable indicator that one that appears on relatively low volume. In addition, the Dragonfly Doji might appear in the context of a larger reversal chart pattern, such as the end of a Head and Shoulders pattern. It's important to look at the whole picture rather than relying on any single indicator.