Last Updated on 10 February, 2024 by Rejaul Karim
Candlestick patterns like the dragonfly doji have gained incredible popularity in late years. Their colorful bodies make it easy to read how the market has behaved and to make out patterns of different kinds.
The Dragonfly Doji is a one candle reversal pattern that forms after a bullish or bearish trend. It has a long lower wick, a short or absent upper wick, and closes and opens at roughly the same price.
In this article, we’re going to have a closer look at the dragonfly doji, its meaning, definition, and how to improve the accuracy of the pattern. We’re also going to look at a few example strategies.
How to Identify a Dragonfly Doji
Here is how you identify a dragonfly doji:
- The candle closes and opens at the same price. Preferably at the exact same level, but it’s not necessary.
- The lower wick is very long.
- The upper wick is absent or close to non-existing.
Since the dragonfly doji is both a bullish and bearish reversal pattern, it could be preceded by either a bullish or bearish move.
What Does the Dragonfly Doji Mean?
Every candlestick pattern tells us a unique story about how the market has moved, and how market participants have acted. While you are free to interpret every pattern as you wish and no interpretation could be said to be better than another at first glance, I thought that we were going to take a closer look at one common way of interpreting the pattern.
Regardless of whether it’s correct or not, it’s a good exercise to think about patterns in this way. It will certainly provide some good inspiration for trading ideas to base your strategies on!
Now, since a dragonfly doji could occur both after a downtrend and an uptrend, it means that we might interpret it differently depending on the preceding trend. As such, we’ll be having a look at two variations, which are:
- A dragonfly doji after a bullish trend
- A dragonfly doji after a bearish trend.
A Dragonfly Doji After a Bullish Trend
The market is in a bullish trend, and continues to head higher. As such, the dominating market sentiment is bullish, and market participants are long in belief that the market is going to continue higher.
However, as the market opens the next day, the buying pressure seems to have disappeared overnight, and sellers seize power. They manage to push the price down a significant amount, but soon buyers return in the anticipation of a market correction. They assume that it has to go up by now and that the down move was just a pullback.
As such, the buyers succeed to push prices back to where the market opened. However, there they find that sellers are have created a resistance around the open of the bar, and refuse buyers to push the market higher. As a result, the market closes at the same level as it opened.
The fact that buyers didn’t manage to push prices past the open, while sellers made the market perform a deep dip, becomes a sign that the market is hesitant about moving higher. As such, it becomes a sort of reversal signal.
A Dragonfly Doji After Bearish Trend
The market is in a bearish trend, and the dominant market sentiment is bearish. As such, most market participants believe that the market is going to head lower.
As the market opens the next day, their belief seems to hold true. Prices dive headfirst and another bearish day seems to be forming.
However, during the day, buying pressure increases rapidly and manages to push the market back to where it opened. This significant and sudden change in sentiment becomes a sign that the bearish trend might have come to an end.
Dragonfly Doji Examples
Here are two examples of the dragonfly doji:
How to Improve the Dragonfly Doji Pattern
Candlestick patterns seldom work very well on their own, and most traders would agree that you need to include some type of filter or extra condition to make them tradable.
In this section of the article, we’re going to show you a couple of ways that we go about to improve and build our own strategies.
Now, every method discussed below won’t work on every market. As with all strategies and patterns, they work better in some markets than others. As such, you will have to use backtesting, to ascertain what works and not!
1. Use Volume
Volume is a great indication of the conviction of the market, and is like adding a second layer to your trading, with information that you wouldn’t have otherwise!
In our own trading strategies, these are the filters we normally use:
- Volume is greater or smaller than the volume moving average
- Volume is greater or smaller than the volume of the previous bar.
- Volume is at it’s lowest or highest reading x-bars back.
All these conditions could work quite differently, even when tested on the same market. However, we have trading strategies that make use of all three versions, and recommend that you test all of them to see what works best.
In addition to the things we mention here, you shouldn’t be afraid to test volume with other trading indicators. For example, we’ve had some great experiences with RSI and volume, only to mention one example!
2. Measure the Strenght of the Trend
The trend strength, which in some form is a sign of the conviction of a market, is often of great help to determine the validity and accuracy of a pattern, like a dragonfly doji.
Sometimes you will find that high readings work well, while the very opposite may be true sometimes as well.
In the strategy examples below, we’ll use the ADX indicator, which is one of our favorite trading indicators, to measure the trend strength.
One thing you should take advantage of in trading is that some markets have recurring tendencies based on seasonality. For example, some markets could be extra bullish or bearish on certain days of the week or month. In addition to that, some parts of the day might work better with the dragonfly doji than others.
Here are some examples of what we use in our own trading:
- Time of day
- Day of week
- Day of month
Now, if you know that certain days of the week are more bullish than others, you could try and implement that in your analysis. For example, a dragonfly doji at the end of a bearish trend, happening on a day that’s typically very bearish, could be a very strong sign! Despite the bearish character of that day, the market managed to perform a bullish reversal candle!
Dragonfly Doji Trading Strategies
In this part of the article, we wanted to show you a couple of different trading strategy examples.
Please keep in mind that these are not meant for live trading, but to show you how we think when building trading strategies.
You will notice that they don’t contain that many filters and conditions. This is important for a strategy to work in live trading, since we otherwise run a high risk of curve fitting, meaning that the strategy doesn’t work on live data.
You can read more about this in our article on curve fitting.
Let’s now get to the trading strategy examples!
1. Dragonfly Doji with High ADX Reading.
We previously mentioned that volatility can have a great impact on the profitability of a trading strategy.
In this strategy example, we use the ADX indicator, one of our favorite indicators, to measure market volatility and go long if we have high market volatility.
We’ll use the ADX with its default 14-period length, and require that it’s above 20 for us to take a trade.
Here are the strategy rules. Buy if:
- We have a dragonfly doji.
- The 14-period ADX is above 20
- It’s preceded by a bearish trend, defined as that the market is lower today than it was 10 bars ago.
Then we exit the trade after 5 bars.
2. Dragonfly Doji With Bollinger Bands
In this strategy example, we’ll go both short and long on the dragonfly doji pattern. As you probably remember by now, the pattern is a bullish or bearish reversal pattern depending on if it’s preceded by an up or downtrend.
To know when to go long and when to go short, we’ll use Bollinger bands.
Bollinger bands consist of three bands and is a simple moving average that’s surrounding by a lower and upper band, which are drawn two standard deviations from the moving average to either side.
You can read more about Bollinger bands in our complete guide to Bollinger bands
As such, when the market is above the upper Bollinger band, we’re at overbought levels, indicating an imminent market reversal (in the case of mean-reverting markets). That’s when we want to short a Dragonfly Doji.
Conversely, when the market is below the lower Bollinger band, we want to go long on a Dragonfly Doji.
So the rules for the strategy become:
- Go long on a dragonfly Doji below the lower Bollinger band.
- Go short on a dragonfly Doji above the upper Bollinger band.
Then we’ll exit both long and short trades as soon as the market reaches the middle Bollinger band.
3. Dragonfly Doji and Volume
The dragonfly doji is a quite dramatic pattern, involving quick and sudden shifts from buying to selling pressure.
To make sure that many market participants supported the move, we might want to include a volume filter, and demand that the dragonfly doji was effectuated with more volume than the surrounding bars. That way we make sure that many market participants contributed to forming the pattern, which at least in theory should improve the accuracy!
Here are the rules for this trading strategy. We’ll go long if:
- There is a dragonfly doji.
- The volume of this bar is higher than the volume of the previous bar
- The volume of this bar is higher than the 10-period volume moving average
Then we’ll exit the trade after 5 bars.
Exploring Other Dojis
Apart from the dragonfly doji, there are a couple of other doji candlestick patterns that might be good to know. Those are:
Each link above leads to stand-alone articles that cover each pattern in greater detail!
In this article, we’ve had a closer look at the dragonfly doji candle. We’ve looked at its meaning, how you could use it in trading, and also some examples trading strategies that we hope will spark your creativity to come up with your own strategies!
Before we end the article, we just want to stress the importance of TESTING EVERYTHING YOURSELF before trading it live. The filters and strategies in this article, or in any other article online, don’t work on every market or timeframe.
To know what markets and timeframes to trade you need to use backtesting.
To learn more about this, we recommend that you read our guide to building a trading strategy or our complete guide to backtesting!
Here you can find our Candlestick pattern archive with many articles covering the subject.
How does a Dragonfly Doji after a bullish trend affect market sentiment?
In a bullish trend, a Dragonfly Doji suggests a shift in sentiment. Buyers initially push prices higher, but sellers regain control, creating a resistance level. The fact that prices close at the same level as they opened signals market hesitation.
What does a Dragonfly Doji after a bearish trend indicate?
After a bearish trend, a Dragonfly Doji signals a potential end to the downward movement. Despite an initial decline, buyers step in, pushing prices back to the opening level. This sudden change in sentiment suggests a possible reversal.
How can Dragonfly Doji patterns be used for both long and short trades?
The content presents a strategy using Bollinger Bands where Dragonfly Doji patterns below the lower Bollinger band signal a long trade, while those above the upper band indicate a short trade.