A dragonfly doji candlestick pattern predicts a trend reversal in a bear market and anticipates a rally in prices.
This type of Japanese candle, used in technical analysis, is an easy indicator to perceive. Its shape, as we will see in the next section, has certain peculiarities that can be easily observed in a graph.
We are again facing a candle that seeks to predict changes in the market. Thus, it is similar to others such as White Marubozu. Of course, we should not analyze it alone, but with other parameters that strengthen the possible prediction.
Dragonfly doji candle formation
Basically, it starts with a bear market that runs out of steam and gives way to a bull market. In this way, the price collapses, but then returns to its opening level. To make a prediction, it is convenient to take into account several moments in time and not just one.
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After the appearance of a dragonfly doji candlestick, traders move from long to short positions. That is, they go from being interested in buying to doing it to sell. Therefore, the market may end up changing its downward trend.
Trading a dragonfly doji candlestick pattern
First of all, we must remember that it should not be analyzed alone, but with other indicators. For example, moving averages or relative strength (RSI) are useful. It must be borne in mind that a trend change that is wrongly predicted will generate losses for the investor.
On the other hand, this pattern is valid, in addition to the stock market, in the cryptocurrency market. In fact, it is widely used in technical analysis and trading as a measure of trend changes.
Dragonfly, hammer and hanging man
There are two types of candlesticks similar to the dragonfly doji candlestick. It is important to know them to avoid confusing them. The first is the hammer, which occurs when the market is trending down. The second is the hanging man, similar to the previous one, but in bull markets.
However, there is a fundamental difference between them. The hammer candle should appear at the end of a downtrend and the hanging man in an uptrend. Doji candlesticks, including the dragonfly, appear in any position.
Dragonfly doji candle and tombstone doji candle
Let’s see, to finish, a candle identical to this one, but with the figure upside down, as we see in the image. Thus, the same thing happens as in others such as White Marubozu, with respect to Black Marubozu, being its opposite meaning.
In this case, the tombstone candle appears in rising markets. Thus, in them it is expected that the price will begin to fall and, therefore, we will have to take short or sale positions. That is why it is important not to confuse it with the dragonfly doji candlestick.