A Dragonfly Doji is a candlestick pattern that could indicate the potential price reversal to the downside or upside, depending on previous price movement. When the asset's high, open, and closed prices are all the same, it forms a triangle.
The extended lower shadow indicates that there was strong selling during the candle period, but the fact that the price closed near the open indicates that buyers were able to absorb the selling and push the price back up.
The Dragonfly Doji candlestick chart pattern is commonly regarded as a bullish reversal candlestick chart pattern that appears at the bottom of downtrends. It is a famous Candlestick pattern that can assist traders in identifying areas of support and demand. In addition, it could be used in conjunction with other indicators to detect a prospective upswing.
The Dragonfly Doji chart pattern is characterised by a T-shaped candlestick formed when the open, high, and closing prices are very close. Although uncommon, the Dragonfly can appear when all of these prices are the same. Therefore, the extended lower shadow is the most crucial aspect of this pattern.
This pattern is likely an indication of a potential price reversal in security. It occurs when a security's open, close, and high prices are nearly identical. As a result, it is T-shaped, with no top tail and only along the lower tail.
Such a pattern with a long lower tail suggests that enormous amounts of selling have flooded the market, causing downward pressure on the security price for a specific period. However, at the end of that period, the close price can still remain at the open price level. It implies that market purchasers can absorb this much selling and pull the price down.
This pattern might also be an indicator of a price reversal. When the price of a security has been trending lower, it may indicate an impending price hike. In this scenario, the Dragonfly is bullish. If the candlestick immediately following the bullish Dragonfly rises and ends at a higher price, the price reversal has been confirmed, and trading decisions can be made.
When the market has previously shown an upward trend, this chart pattern may indicate a price decline, known as a bearish dragonfly. The next candlestick's downward descent will offer confirmation.
This candlestick pattern can help traders make trading decisions. They typically place orders immediately after the confirmation candlestick appears. A trader can long a stop loss below a bullish dragonfly's low or short a stop loss above a bearish dragonfly's high.
It appears infrequently, yet price reversals occur frequently. As a result, this candle pattern is not a particularly dependable indication of price reversals. Even with the confirmation candlestick, the price is not assured of maintaining the trend.
Such a candle pattern with a higher volume is typically more trustworthy than one with a lower volume. It also holds true for the confirmation candlestick.
Aside from the issue of dependability, another limitation of the Doji pattern is that it cannot provide price targets. Determining the return on trade is impossible based solely on this chart pattern’s research. Traders must use other technical indications or patterns to determine the best time to depart.
Although it is commonly used for stock trading, trading cryptocurrency with it is not as difficult. When the pattern appears near the bottom of a downtrend, it can be interpreted as a strong buy signal. When the pattern appears in other contexts, it simply indicates a local price rejection.
Most methods of this chart require the pattern to form at the bottom of a bearish swing. When this primary criterion is met, traders will look for the best time to enter a long position in anticipation of a trend reversal. Those with active short positions would seek to close them elsewhere.
Even though the pattern provides a reasonably accurate signal, it is critical to consider other technical indicators, such as moving averages, and one of the oscillators, such as the Stochastic or the Relative Strength Index (RSI). In addition, the momentum indicators will indicate whether the price has reached an oversold level and is poised to recover.
Aside from the indicators mentioned above, traders would prefer to open positions during periods of higher volume, increasing this candle pattern's reliability.
Another key factor to examine is the extent of the lower shadow - the longer it is, the more relevant the bullish signal is.