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Methods of Using Dragonfly Doji Candlestick in Forex Trading

What is a Dragonfly doji candlestick? How to identify, trade with it?

Hello dear friends. If you are reading this article, you are probably interested in financial markets and have heard of technical analysis. Did you also know that Japanese candlesticks are essential in this field? Yes, candlesticks visually reflect everything happening in the market. There are various types of Japanese candlesticks, and today, we will talk about one of them, the Dragonfly Doji candlestick.

Topic: Dragonfly Doji

Type: Bullish

Trend direction: Reversal

Opposite pattern: Gravestone Doji

Dragonfly Doji formation and structure

Dragonfly Doji, a member of the Doji family, is a candlestick pattern. This candlestick represents a formation where the opening price of a candle is above its highest price, and the closing price is near the opening price. Dragonfly Doji is typically seen as a candlestick on a price chart and appears under specific conditions. This pattern is observed in Japanese candlestick charts, a candlestick charting technique. The main characteristics of a Dragonfly Doji are:

  • The open price is above the high price.
  • The close price is close to or equal to the open price.
  • The body length is zero or close to zero. In other words, the body is absent or very small.
  • The lower shadow (wick) is very long and the upper shadow (wick) is absent.

A visual guide to identifying the Dragonfly doji candlestick
Dragonfly Doji Candlestick

Dragonfly Doji usually occurs in a downtrend or after a decline. We use these candlesticks as an indicator of price movement in financial markets. Dragonfly Dojis signify a balance between supply and demand and indicate indecision in the market.

Interpretation of Dragonfly Doji

Dragonfly Doji candlestick patterns can indicate situations where traders are emotionally unbalanced in the market and buyers are starting to take control. The fact that the opening price is at a high level may indicate that sellers are reluctant to push the price down further. If this pattern occurs after a downtrend, it can be interpreted as a sign that the downtrend is ending or weakening.

In addition, Dragonfly dojis can occur in both uptrends and downtrends. If it occurs in an uptrend, it indicates a possible top. If it occurs in a downtrend, it indicates a possible bottom. Dragonfly doji also occurs when there is indecision in the market. This usually means that a trend is nearing its end or that a trend is about to begin.

How do we trade with Dragonfly Doji?

Like other Japanese candlesticks, Dragonfly Dojis are also an important tool in technical analysis. By using these formations correctly, it may be possible to predict market trends and possible reversal points. Dragonfly Doji is typically known as a bullish candlestick, and when it appears on charts, it is thought that prices will rise. In some rare cases, Dragonfly Doji can also be seen as a bearish candlestick. Let's now examine some examples of this.

BUY (Long Position) Order: The appearance of a Dragonfly Doji pattern is often seen at the end of a downtrend. In a situation where Dragonfly Doji appears in a downtrend or at the end of a downward movement, we can consider it as a bullish signal. As an entry point, we wait for the next candle to close with an upward move after the appearance of Dragonfly Doji. Then, we can set an entry level just above the highest point of the Dragonfly Doji. It is generally preferred to place a Stop loss a little below the lowest point the price reached (the tip of the wick) and close to a support level. When determining the take profit level, each trader can use a risk-reward ratio that suits their strategy. The example of this is given in the following graph:

Dragonfly doji candlestick: a bullish reversal signal at the end of a downtrend
Dragonfly Doji Trading Strategy

Sell (Short Position) Order: Sometimes Dragonfly Doji can also appear in an uptrend, and in this case, it can be considered as a bearish signal at the end of the uptrend. If Dragonfly Doji forms in an uptrend, we expect the next candlestick to move downward. If this candlestick confirms that the Dragonfly Doji is a selling signal, a short position can be opened. A Stop loss is placed just slightly above the highest point the price reached (resistance level). The take-profit level is determined according to the risk-reward ratio. See the US Dollar/Japanese Yen 4-hour chart as an example:

A step-by-step guide to trading dragonfly doji candlesticks as bearish reversal signals, but not always.
Sometimes Dragonfly doji bearish reversal signal. USD/JPY chart

Note: A Dragonfly Doji is more likely to be a valid trend reversal signal if it occurs at the end of a long trend. Additionally, a Dragonfly Doji is more likely to be a reliable trend reversal signal if it occurs near a significant support or resistance level. Remember that every trade involves risk, and like any trading strategy, Dragonfly Dojis are also risky. Confirm this pattern with other technical indicators and analysis tools. Therefore, it is always important to apply risk management strategies and trade with small amounts.

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