A dragonfly doji is a single candlestick shaped like a "T", where the open, high and close are at or near the same price and a long lower shadow hangs below them. When a dragonfly doji forms after a downtrend at a support level, the candle signals a potential bullish reversal: sellers drove price down during the session, and buyers pushed price all the way back to the open by the close.
The dragonfly doji is rare, and on its own the pattern works only about half the time. Before entering a trade on a dragonfly doji, traders use three checks: a confirmation candle that closes above the dragonfly doji high, above-average volume, and a support level under the dragonfly doji low.
What Is a Dragonfly Doji?
A dragonfly doji is a single candlestick pattern with a "T" shape that signals a bullish trend reversal, hence it forms during a downtrend. It forms when the open, high and close of a session are at or very near the same price, while the low sits well below them. Traders read it as a possible bullish reversal when it appears at the bottom of a downtrend.
The dragonfly doji belongs to the doji family. A doji is any candle whose open and close are equal or nearly equal, which shows indecision between buyers and sellers. The dragonfly doji is the version where price tested much lower during the session and still closed back at the high.
A dragonfly doji is sometimes also called a dragon fly doji, doji dragonfly or dragon doji, and all of these names mean the same single candlestick pattern shaped like a "T". A true dragonfly doji is rare, because the open, high and close seldom land on the same price.
What Does a Dragonfly Candlestick Look Like?
A dragonfly candlestick has three parts: the body, the lower shadow and the upper shadow. The shadows (wicks) of a candle are the thin lines above and below the body that mark the high and low of the session.
A common rule for spotting a dragonfly doji on a chart is a body that looks almost like a line, with the lower shadow making up most of the rest. The long lower shadow is the most important part of a dragonfly doji. A candle with a tiny body and a short lower shadow is an ordinary doji.
A dragonfly doji can be green or red. A green dragonfly doji closed slightly above its open, and a red one closed slightly below it.
Why Is the Long Lower Shadow of a Dragonfly Candle Important?
To see why the long lower shadow of a dragonfly doji matters, look at the price action inside the session and the trader psychology behind it. The long lower shadow records three stages of the trading session:
Sellers take control first. The session opens and selling pressure drives price well below the open.
Buyers step in at a support level. Near the low of the session, buyers absorb the selling, and price stops falling.
Buying pressure returns price to the open. By the close, buyers have pushed price back up, so the session ends at or near its high.
After a long downtrend, a dragonfly doji signals seller exhaustion: the sellers who drove the downtrend are running out of strength. Traders holding short positions often take profit when a dragonfly doji forms, and the closing of their positions, turns into buying which adds to the buying pressure.
In a dragonfly doji, price only returns to the open and no higher, so the close of the session is still neutral. A dragonfly doji therefore needs a confirmation candle before it becomes a trade signal.
Dragonfly Doji Meaning: Is It Bullish or Bearish?
The understanding of dragonfly doji’s meaning comes from understanding the trend that the candle forms in. A dragonfly doji is bullish after a downtrend and a warning sign after a long uptrend.
Dragonfly Doji in a Downtrend
After a downtrend, a dragonfly doji signals potential bullish reversal. A dragonfly doji is most useful when its low touches a support level, such as a previous swing low or a round number, because the candle shows buyers defending that level. Bulkowski's data shows the dragonfly doji performs best when it forms near the yearly low.
A dragonfly doji in the middle of a downtrend, away from any support level, is unreliable, and price often keeps falling after it.
Dragonfly Doji in Uptrend: Is There a Bearish Dragonfly Doji?
When a dragonfly doji forms at the top of a long uptrend, it is a warning sign. The long lower shadow of a dragonfly doji at the top of an uptrend shows that sellers took control for part of the session, even though buyers pushed price back up by the close.
Traders call a dragonfly doji at the top of an uptrend a bearish dragonfly doji, but it is the same candle. The bearish reading comes from the position of the candle, and a bearish dragonfly doji only becomes a bearish reversal if the following candles close lower.
Where a dragonfly doji forms inside an uptrend changes its meaning. At the high after a long uptrend, treat the dragonfly doji as a warning. At the low of a pullback, where price has dropped back to a support level or a rising moving average, a dragonfly doji has the same bullish meaning as after a downtrend, and traders use it to join the existing trend.
The candlestick pattern with a bearish meaning of its own is the gravestone doji, which is the upside-down version of the dragonfly doji.
How Do You Confirm a Dragonfly Doji Signal?
A dragonfly doji is only a possible signal until other evidence agrees with it. Traders use four checks before entering a trade on a dragonfly doji:
Confirmation candle: the candle after the dragonfly doji closes above the dragonfly doji high. A higher open on the next session is an earlier sign than the confirmation candle, but a weaker one.
Volume: volume on the dragonfly doji or the confirmation candle is above the recent average. Low volume on the dragonfly doji means few traders took part, and the signal is weaker.
Support level: the dragonfly doji low sits on a support level, such as a previous swing low or a round number.
Indicators: an oversold RSI reading, or RSI crossing back above 50, adds weight to the bullish reading of a dragonfly doji.
Interestingly, forex traders run the volume check on tick volume and compare tick volume only with earlier candles on the same chart, because tick counts differ between brokers.
When the confirmation candle, volume, support level and RSI all agree, you act on fewer false signals from the dragonfly doji.
How Do You Trade the Dragonfly Doji Candlestick Pattern?
Building a dragonfly doji trade setup requires three decisions: where to enter, where to place the stop-loss and where to take profit.
Where to Enter a Dragonfly Doji Trade
The standard entry for a dragonfly doji trade is a long position once the confirmation candle closes above the dragonfly doji high. Some traders buy earlier, on a higher open in the session after the dragonfly doji; the earlier entry gets a better price but is placed before the confirmation candle has closed.
Where to Place the Stop-Loss on a Dragonfly Doji Candle
Place the stop-loss a few pips below the dragonfly doji low. If price falls back through the dragonfly doji low, the buyers who defended that low have lost, and the dragonfly doji has failed.
The long lower shadow makes the stop-loss on a dragonfly doji trade wide, because the distance from an entry above the dragonfly doji high to a stop-loss below the dragonfly doji low covers the whole candle. Reduce the position size on a dragonfly doji trade so the money at risk stays the same as on your other trades.
A stop-loss held over the weekend can fill beyond its level if the forex market opens with a gap on Monday. The difference between the stop-loss level and the actual fill price is called slippage, and slippage is larger around major news and in thin markets.
How to Set a Profit Target After a Dragonfly Doji
The dragonfly doji has no built-in profit target. Most traders set the profit target at the nearest resistance level or prior swing high, or at a multiple of the risk such as 2R, which is twice the distance from the entry to the stop-loss.
Check the profit amount to the profit target before entering a dragonfly doji trade. If the nearest resistance level is closer to the entry than the stop-loss is, the trade risks more than it can make at the first profit target.
What Is an Example of a Dragonfly Doji Pattern Trade?
The GBP/USD daily chart shows a dragonfly doji on 1 November 2023. The dragonfly doji formed near the bottom of a downtrend that took GBP/USD from above 1.2700 in August to 1.2037 on 4 October.
The October lows in GBP/USD at 1.2037 and 1.2070 formed a support level, and the dragonfly doji low of 1.2096 held just above that support level. On 1 November 2023, GBP/USD opened at 1.2153, fell to 1.2096 and closed at 1.2152, with a high of 1.2165.
The 1 November candle had a body of 1 pip, a lower shadow of 56 pips and an upper shadow of 12 pips, which fits the dragonfly doji rules. Tick volume on the dragonfly doji was the highest of the surrounding sessions. The dragonfly doji formed on the day of the US Federal Reserve rate decision, and long shadows on forex daily charts often come from news days like this one.
On 2 November, the confirmation candle closed at 1.2202, above the dragonfly doji high of 1.2165. The GBP/USD trade plan based on the dragonfly doji was:
On 3 November, GBP/USD rose to 1.2389 after a weak US jobs report and reached Target 1. On 6 November, GBP/USD reached a high of 1.2428, 8 pips short of Target 2. GBP/USD then pulled back to 1.2187 on 10 November, which stayed above the 1.2085 stop-loss, and reached Target 2 at 1.2436 on 14 November with a high of 1.2506.
In the GBP/USD trade, the reward to Target 1 was only about 1.2 times the risk, because the long lower shadow of the dragonfly doji put the stop-loss far from the entry. A wide stop-loss is the most common problem with trading the dragonfly doji, and position size needs more care on a dragonfly doji than on candles with a shorter range.
GBP/USD prices can differ by a pip or two between data feeds. Past price action does not guarantee future results.
How Reliable Is the Dragonfly Candlestick Pattern?
On its own, the dragonfly doji works only about half the time, according to two published tests:
Barry D. Moore tested 1,703 dragonfly doji trades on 30 Dow Jones stocks over 20 years of daily data, buying at the next open and selling after 10 days. 55.3% of trades were winners, with an average return of 0.46% per trade. The average win was 3.6% and the average loss was 3.4%.
Thomas Bulkowski found the dragonfly doji acts as a reversal 50% of the time, and ranked it 98th of 103 candlestick patterns for overall performance.
In Moore's test, about 55% of dragonfly doji trades won and the average win was about the same size as the average loss, so the pattern alone leaves almost no edge. Moore put most of the small profit down to the long-term upward drift of US stocks. Neither Moore's test nor Bulkowski's required a confirmation candle, a support level or above-average volume, which are the filters traders add to cut false signals.
Moore and Bulkowski both tested US stocks, so their figures do not carry over directly to forex. The chart timeframe also affects the reliability of a dragonfly doji: a dragonfly doji on a daily or weekly chart covers a full session of trading and gives fewer false signals than one on a 5-minute chart. The price move after a dragonfly doji is usually short, so the pattern says little about the long-term trend.
What Are the Limitations of the Dragonfly Doji?
The dragonfly doji has seven limitations to check before you trade it:
The dragonfly doji is rare. A true dragonfly doji needs the open, high and close at almost the same price, so you will not find many on any chart.
The dragonfly doji gives false signals in sideways markets. In a range, or in the middle of a strong trend, a dragonfly doji often forms without a support level behind it and is unreliable.
A dragonfly doji on low volume is weak. A dragonfly doji on below-average volume shows that few traders took part.
The dragonfly doji has no built-in profit target. Traders have to take the profit target from resistance levels on the chart, because a dragonfly doji only gives an entry and a stop-loss level.
The stop-loss on a dragonfly doji trade is wide. The long lower shadow of a dragonfly doji puts the stop-loss far from the entry, which shrinks the reward compared with the risk.
Forex server time changes the daily candle. Forex trades around the clock, so the daily candle depends on when the broker's server closes the day. Charts that close at 5 pm New York time show five daily candles a week, while other server times add a short Sunday candle and move the open of each daily candle, so a dragonfly doji on one platform may not appear on another.
News spikes create false dragonfly doji candles on intraday charts. On 15-minute and 1-hour charts, a data release such as US non-farm payrolls can push price down and back up within one candle. A candle shaped by a news spike looks like a dragonfly doji but is unreliable as a reversal signal.
How Is the Dragonfly Doji Different From the Gravestone Doji and Hammer?
Three candles are often confused with the dragonfly doji: the gravestone doji, the hammer and the long-legged doji.
Dragonfly Doji vs Gravestone Doji
The gravestone doji is the opposite of the dragonfly doji. A gravestone doji is an upside-down "T", with the open, low and close at the bottom of the candle and a long upper shadow. Some traders call the gravestone doji the inverted dragonfly doji.
Dragonfly Doji vs Hammer
A hammer has the same long lower shadow as a dragonfly doji and the same bullish meaning after a downtrend. The difference between a hammer and a dragonfly doji is the body: a hammer has a small but visible body near the high, while a dragonfly doji has almost none.
Dragonfly Doji vs Long-Legged Doji
A long-legged doji has long shadows on both sides, with the open and close near the middle of the range. A long-legged doji shows indecision during a volatile session and is unreliable as a reversal signal on its own. The dragonfly doji has little to no upper shadow and closes at the high, which gives it the bullish reading.
Frequently Asked Questions About the Dragonfly Doji
Does the color of a dragonfly doji matter?
The color of a dragonfly doji matters only a little. A green dragonfly doji closed just above its open and a red one just below, and traders read both the same way. Bulkowski found green dragonfly doji candles did better after an upward breakout, but the support level and the confirmation candle have a much bigger effect on whether the trade works.
What happens if price closes below the dragonfly doji low?
A close below the dragonfly doji low means the pattern has failed, and a long position should be closed at the stop-loss. The buyers who defended the dragonfly doji low have lost, and the downtrend often continues. Bulkowski's data shows that some of the largest moves after a dragonfly doji come from downward breakouts below the dragonfly doji low.
Is a doji a reversal pattern?
A doji on its own shows indecision and is better described as a pause in the trend. Specific types of doji, such as the dragonfly doji and the gravestone doji, can signal a reversal when they form at the end of a trend and the next candle confirms the reversal.
