How to trade Dragonfly Doji Candlesticks with Example: FKnol.com

The dragonfly doji candlestick pattern is a sporadically occurring pattern on the price charts of stocks, ETFs and stock market indexes. The formation of a dragonfly doji candle indicates a potential reversal of the ongoing trend of the prices. For instance, if the dragonfly doji is formed when the price is in downtrend, then the price may start to move up after the formation of dragonfly doji. The dragonfly represents a state of indecision about the future direction of the price movement of the security, which mostly leads to the trend getting reversed.

This doji candlestick formation is cautiously looked upon by the market players traders who follow technical analysis using price charts and patterns. Formation of dragonfly doji is used to decide the potential moves in the future - like, if already holding a position, then should it be closed at a profit or loss, or should it be held on to.
While the formation of dragonfly doji candlestick does not necessarily indicate a true indecision state, it does mean that sellers could not continue to remain strong (as we will sell shortly in the formation section). It primarily acts as a warning signal that a trend reversal may be coming up. For example, the formation of dragonfly doji candlestick following a strong upward move in the stock price may indicate that the market is now getting into an undecided state and it is likely that the stock's upward move may come to a halt or may reverse to proceed with a downtrend over the following period.
Traders who act on dragonfly dojis may like to wait for the next candle (called confirmation candle) to be formed.

Construction of the Dragonfly Doji Candlestick

The dragonfly doji candlestick is formed by any standard doji candle which has a very small body and considerably large shadows or wicks on the lower side only. As the body is relatively small, it means that the opening and closing prices are the same, or nearly similar. Ideally, the upper wick should not exist at all, though a small tip is acceptable.

The lower shadows (also known as wick of the candle) is considerably long compared to the body of the candle which is formed by the open and close prices. That means the open, high and close prices are very similar to each other, while the low price is proportionately far away from the trio.

It leads to the body of dragonfly doji to be located somewhere at the top side of the candle which makes it appear like the dragonfly creature (a fly with large wingspans). Overall, the dragonfly doji appears as a long line, where the 'long body' refers to the lower shadow or wick of the candle, while the 'doji' indicates the small size of the candle body formed by the nearly similar open and close prices.

Color of the dragonfly doji is irrelevant - that is, it can be green or red because the open and close prices are nearly similar. However, the traders following the confirmation candle method usually watch of the color of the confirmation candle as that trend is expected to continue. If confirmation candle is green, the uptrend is expected to follow, and vice-versa. This is how a typical dragonfly doji candlestick appears:

Trading the Dragonfly Doji Candlestick

Though the dragonfly doji forms very infrequently on the price charts of all kinds of assets - be it stocks, indexes or exchange-traded funds (ETFs), it signals that a big and important change may be coming. Trading on the formation of the dragonfly doji depends upon the context and trend, and trading decision should be taken based on the type of situation that leads to formation of the dragonfly doji.

Dragonfly dojis gain significance when they are formed during the uptrend or the downtrend. The formation announces a potential reversal after a long downtrend in the stock prices, especially when the lower shadow is considerably long. Dragonfly doji means that sellers (bears) had the full control during the initial phase when the price opened and they took the price down to the lowest level. However, the buyers (bulls) regained the control and pulled the prices back to the top initial level before the candlestick close. Therefore, the candlestick closed with a long lower shadow, and had open, high and close at the same level. This indicates a reversal signal in a continued bear market.
When dragonfly doji is formed, active traders usually wait for one or more next candlesticks to be formed next as confirmation candle(s), so as to confirm if the bulls still and realistically have the control. It can be confirmed when a confirmation candle forms a reasonably long bullish body. The bullish body indicates that bulls have taken the full control and took the price higher where it closed. Its the time to go long, or buy the stock.

Additionally, traders may also look for the location of dragonfly doji formation. They enter the trade only when the dragonfly doji is formed at the lower Bollinger band breakout, or at the breakout of the trend-line (like 200-day moving average), or similar other range breakouts. The larger the breakout indicated by the length of the lower wick of the candlestick, the stronger the reversal pattern. If the dragonfly doji is formed in the middle Bollinger band or far away from the trend-line (without breaching the trend-line), then the traders may not consider it as a strong reversal signal and they avoid the trade. When formed around the middle band or away from the breakout range, the dragonfly doji mostly leads to continuation of the existing trend, but historical instances are insufficient to conclude on that.

Trading Scenario for Dragonfly Doji

Here are the general considerations and scenrio for trading the dragonfly doji candlestick.

▶ Trade Entry: Formation of dragonfly doji during a downtrend is taken as a sign of reversal, that is - the market is expected to go upward in near future. So traders take a long position at or around the low price of the dragonfly doji. If formed during a uptrend, then it is not that relevant and is considered as just another doji indicating market indecisiveness.

▶ Stop-loss Limit: The stop-loss varies from trader to trader based on their individual trade preferences, but usually while going long they set the stop-loss at the low price of the dragonfly doji (or even a bit lower).

▶ Profit-levels: Traders should follow a risk-reward ratio to determine the possible profit level from their dragonfly doji trading. For instance, if the stop-loss limit is set at $1 (the maximum loss one is willing to take on a trade) and the risk-reward ratio one follows is 1/2, then one must take profits when it hits $2. If the risk-reward ratio being followed is 1/3, then one must aim for profits when the price hits a level that generated $3 for every $1 stop-loss set.

▶ Market Conditions: More volatile stocks with high beta values often tend to have high occurrences of dragonfly doji formations. Therefore, stock selection gains prominence while taking on dragonfly doji-based trading. Along with the above mentioned dragonfly doji formation requirement, traders should ensure that their selected price range, bands or trend-line limits are getting breached with large moves of the lower shadow of the dragonfly doji candlestick. This ensures higher success rate of profitability. Although one must note that trading on technical analysis like candlestick patterns has limited success rate, so following strict stop-loss, disciplined trading and efficient capital management is advised.

Traders must also note that the dragonfly doji is not a common occurrence, and people often tend to enter into a trade which is not very reliable. It is recommended to wait for the confirmation candle to form. It is also difficult to precisely set the stoploss and profit-levels for dragonfly doji, because the length of the lower shadow can vary a lot. While experienced traders can make the best out of these infrequently occurring dragonfly doji, the novices should observe it rather than immediately act on it, and start jumping on the trades only when they have gained enough experience and confidence about setting the right target levels.

Example of Dragonfly Doji Candlestick

The following chart shows an instance of dragonfly doji candlesticks and the uptrend that followed shortly after:

As one can observe, the formation of the dragonfly doji candle reversed the downtrend that preceded the doji candle, and led to an upward move indicated by the green arrow. The trend reversal was also confirmed by another red doji candles which formed immediately after the formation of the first dragonfly doji candle, and was located considerably above the first dragonfly candle indicating a confirmation for the up move.
Traders usually set their profit targets and stop-loss levels based on the risk-reward ratio of their choice as mentioned in the previous section.

Latest Dragonfly Doji Formations

FKnol.com has a dedicated section on candlesticks where the list of stocks, ETFs and indexes forming dragonfly doji candles is updated on a daily basis. At present, the following stocks have formed the dragonfly dojis as of the mentioned date (in reverse chronological order):
1) On Wednesday, Jan 20, 2021, the stock price of Consumer Services sector based Target Corp. (TGT) formed the following Dragonfly Doji Candlestick pattern:

Open	High	Low	Close
$188.50	$188.70	$184.54	$188.30

Body-Length	Candle Length	Body-to-Candle Factor
0.20	4.16	0.05

		$188.50 ~= $188.70 ~= $188.30


		$184.54

See full details and past history of Dragonfly Doji Candlesticks for Target (TGT)

▶ Full list of stocks which most recently formed the Dragonfly Doji Pattern

2) On Thursday, Jan 21, 2021, the price of Large-Cap based Vanguard FTSE All-World ex-US ETF (VEU) ETF formed the following Dragonfly Doji Candlestick pattern:

Open	High	Low	Close
$61.43	$61.46	$61.06	$61.41

Body-Length	Candle Length	Body-to-Candle Factor
0.02	0.40	0.05

		$61.43 ~= $61.46 ~= $61.41


		$61.06

See full details and past history of Dragonfly Doji Candlesticks for Vanguard FTSE All-World ex-US ETF (VEU)

▶ Full list of ETFs which most recently formed the Dragonfly Doji Pattern

3) On Thursday, Dec 24, 2020, the value of popularly tracked leading stock market index S&P MidCap 400 (MID) formed the following Dragonfly Doji Candlestick pattern:

Open	High	Low	Close
$2316.30	$2317.49	$2304.12	$2315.36

Body-Length	Candle Length	Body-to-Candle Factor
0.94	13.37	0.07

		$2,316.30 ~= $2,317.49 ~= $2,315.36


		$2,304.12

See full details and past history of Dragonfly Doji Candlesticks for S&P MidCap 400 (MID)

▶ Full list of Market Indexes which most recently formed the Dragonfly Doji Pattern

...and there's more. FKnol.com everyday checks the stock price and candlestick formation across hundreds of stocks, ETFs and indexes to look for dragonfly doji formations. Please see the full list of recent dragonfly doji formations for:
▶ Full list of recent Dragonfly Doji Stocks
▶ Full list of recent Dragonfly Doji ETFs
▶ Full list of recent Dragonfly Doji Indexes

The Bottom Line

Trading candlesticks like the dragonfly doji needs strict discipline and emotion-free trading. Candlestick trading is a part of technical analysis and success rate may vary depending upon the type of stock selected and the overall market conditions. Use of proper stop-loss, profit level and capital management is advised.
One can also explore the similar candlestick formations on various dates using the below screener:

Search Dragonfly Doji Candles for a particular: