The dragonfly doji is a bullish reversal candlestick pattern. A candle forms with a very small to almost nonexistent body with a long lower wick. The lower wick or shadow is significant, several pips long. There is little or no upper wick.
How to trade the dragonfly doji?
The pattern signals the end of a downtrend or a downward retracement. This means that you can enter long after the pattern at the open of the next bar. In case you are more conservative, you can wait for a confirmation. A good confirmation is if the next bar (or one of the following few bars) closes above the high of the dragonfly doji. Place your stop a few pips under the low of the dragonfly candle. If you wait for a confirmation that usually means that your risk/reward ratio drops as the entry point is farther away from your stop.
You should trade this pattern in an uptrend if there is a retracement and there is enough ‘room’ for profits. It is a powerful setup if the established uptrend retraces and the dragonfly doji appears near some kind of support (certain popular moving averages, fibonacci lines or previous significant highs/lows).
If you expect that the downtrend is soon over, (e. g. fundamentals suggest) then this pattern is a good sign for reversal. It makes sense to look for reinforcing signs for trend reversal, such as further bullish reversal candles appearing nearby, divergence in significant indicators compared to the price of the instrument (e.g. RSI or MACD), strong support lines (popular moving averages, Fibo lines, previous highs, etc.)
As mentioned above, entering at support is a good idea. In case the dragonfly doji appears at or near support, you have a good chance for a successful long trade. You have to make sure that either a) the dragonfly doji itself or b) the following confirmation candle closes obviously above the support level.
It is generally a bad idea to enter long below a significant resistance level. It is also not recommended (as written above) to enter long after this pattern if there is no retracement in the trend.
How reliable is the dragonfly doji?
In itself the pattern is not very reliable, especially in case of those instruments, where there is not a lot of volume. Our performance rank is 4 out of 4, which means this is among the weakest patterns. You can still trade it safely however if you apply the reinforcement factors mentioned above.
Dragonfly doji for stocks
There is nothing very specific for stocks regarding the dragonfly doji. It is important however to make sure there is enough volume, otherwise you will see a lot of false signals. If the volume is low, better ignore the pattern.
Dragonfly doji for forex
The longer the timeframe, the better it works for forex, however we still don’t recommend to trade only based on this signal. Look for strong reinforcements, otherwise you will lose money.
Dragonfly doji for Bitcoin
Similar to forex, better look at longer timeframes here, e.g. daily. It also makes sense to consider the candle size. The bigger it is, the stronger the signal. Also do not trade the candle without other reinforcement signals.
The dragonfly doji is also known as the ‘umbrella’ candle as it resembles to an open umbrella (if you have not seen an umbrella before) . The bearish pair of the candle is the gravestone doji a relatively weak bearish reversal pattern.