Dragonfly Doji is a kind of candlestick pattern that can inform about a potential reversal in price to the upside or downside, depending on past price action. According to Fred K. H. Tam "The Dragonfly is formed when the open, close, and high are at the same price during an average or larger daily range. It has a long lower shadow" (F. K. H. Tam 2015, s. 47).
The Dragonfly Doji does not happen often, but when it does it is an information that trend may change direction. In the opinion of Fred K. H. Tam: "Like all doji, the Dragonfly Doji can be interpreted both as a reversal or a continuation pattern. The important criterion is to identify where the doji is found. If the doji is found after a rally or at a high price area, it is generally viewed as a potential bearish reversal pattern. If it is found after a downtrend or at a low price area, it has potential bullish reversal implications. But if found in a sideways market, it is viewed as neutral" (F. K. H. Tam 2015, s. 47).
According to Michael C. Thomsett, the dragonfly doji is almost always understood as a bullish signal due to the long lower shadow. Nevertheless, it may also work as bearish information with aspect at the top of an uptrend(M. C. Thomsett 2012, s. 80 - 82).
Dragonfly Doji (bear)
Dragonfly doji (bear)is a type of dragonfly occurring at the top of an uptrend. This candlestick has a long lower shadow and no upper shadow. We can normally see it in the opposite position, at the bottom of a downtrend and representing a bullish resupination. The bearish edition subsists due to the context of placement. When the session is continuing, prices open and close at or close to the same level and a sell-off appears during the day, only to bounce to the level of the opening price. In a bearish framework, it informs us about the possibility of lost momentum among the bulls. Nevertheless, this candlestick has to be viewed with warning. The bearish dragonfly doji is comparable to the hanging man but the most important difference is that the hanging man is likely to have some degree of a real body, usually estimated to a square shape rather than the longer rectangle. A dragonfly doji often has no real body (M. C. Thomsett 2012, s. 80).
Dragonfly Doji (bull)
As we can read in a literary work of Michael C. Thomsett, dragonfly doji (bull) is a doji with a long lower shadow and little or no upper shadow. It functions like a bull reversal when it occurs after an extended downtrend. The long lower shadow shows that sellers tried to move the price lower but lacked strength, and momentum shifted to buyers instead. This one-session signal can be a bullish reversal or bearish continuation. Approval has to be required before acting on the single-stick indicator. In a bearish continuation, the failed try by sellers to move prices lower affects momentum only during the session but does not stop the price from continuing downward. The form and location of the bullish dragonfly doji is nearly the same as the hammer, a bullish reversal signal. However, the hammer may adopt some real body, while the dragonfly has little or no real body (M. C. Thomsett 2012, s. 82).
The Difference Between the Dragonfly Doji and the Gravestone Doji
The most important difference between the dragonfly doji and the gravestone doji is that the latter appears when the low, open and close prices are equal and the candle has a long upper shadow. The gravestone is similar to upsidedown "T". The implications for the gravestone are the same as the dragonfly. Both indicate possible trend reversals but must be confirmed by the candle that follows (S. Nison 2004 s. 44 - 45).
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Author: Patryk Kozioł