Dragonfly Doji: The Constraints of a Dragonfly Doji


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Dragonfly Doji: A doji is a Japanese candlestick designed to indicate the status of a chart or market. Doji is typically inscribed with the name of the chart or market, and they can be used to signalize short-term price changes.

A dragonfly is used as the symbol for Japan in this candlestick design. Doji Candlesticks have been around for centuries and are still widespread today. They’re a graphic design element that can be used to add interest and separation to your designs. Doji Candlesticks come in various shapes and sizes, and they can be used as either an indictor or a pointer. Here are the constraints of a dragonfly Doji candlestick.

The Doji Body Must Always Stay Above The Midpoint Line Of The Trading Range

The body of the dragonfly doji candlestick must stay within the trading range of the asset. If the body drops below the lower limit (the lowest point on the graph), it has moved into a bearish trend. On the other hand, if the body rises beyond the upper limit (the highest point on the graph), it’s moving into a bullish trend. In both cases, the body should move back towards the middle line of the trading range at some time before a reversal occurs.

The Head Size Determines The Strength Level Of The Signal

Another constraint of a dragonfly dojis is when the body length of the candlestick becomes equal to the head width; it signals a very strong move higher (a large gap up). This is because the candlestick represents the largest value of volume associated with the point in question. However, if the candlestick is small compared to its head, it indicates weaker prices. It’s much like the difference between buying stocks priced at $10/share versus stocks priced at $50/share. You’ll need more money to buy the larger shares, and thus you will likely pay a premium.

The Tail Width Determines The Timing Of The Reversal

A wide tail indicates a powerful move down. And since a wide tail moves quickly, it usually indicates a rapid change in momentum. Conversely, a narrow tail tells us there might be trouble ahead. A narrow tail may also signify a weak turn downward. For instance, there could be a slow decline instead of a quick drop. This constraint works only if the body remains inside the trading range of the underlying asset.

The Shadow Lengths Determine The Direction And Speed Of The Move

A long shadow shows a fast upward movement. If the shadow is shorter than the body, it means the price hasn’t changed much over the past three hours. On the other hand, a short shadow shows a steep uptrend. When the tails overlap the bodies, we can see a double bottom formation which suggests the uptrend has turned into a downtrend.

The Closing Body Size Determines The Level Of Support For The Price Action

If the closing body is wider than the opening body, it suggests a high probability of upward movement following the pattern. On the other hand, the opposite is true when the closing body is smaller than the opening body. These patterns tend to occur late in the day after the market closes. This constraint is especially important for traders who trade based on technical analysis.

The Slope Of The Upper Boundary Denotes How Hard The Resistance Will Break

More sloped lines suggest that the breakout will result in gains. Less sloped lines imply that the breakout might be volatile. This constraint works only in rising markets and not during declines, so this technique is an additional measure following a downtrend. Note that too steep of an angle can lead to false signals when the price breaks out from the channel.

The Overall Shape Of The Candlesticks Indicates What Happened Last

When the charting software generates a butterfly or reverse head and shoulder setup, look at the previous bar and compare it to current bars. If the previous bar was stronger than the current one (i.e., when you see a bigger rise), the next bar might follow suit. That means the current candle follows the same type of pattern. On the other hand, if the previous bar was less impressive than the current one, the current candle won’t follow the same pattern.

The Lack Of A Prior Trend Indicates The Possibility Of A New Trend

A recent downtrend often ends without any indication of a new trend. In such cases, it usually indicates that the selling phase is complete and a new uptrend has begun. However, once the downtrend begins, it never stops until the price returns to the top of the trading range, where the selling pressure ceases. Such constraint applies only when the prior trend is clear enough to determine the endpoint.

The Constraints of a Dragonfly Doji

Multiple Bottoms Within A Single Channel Indicate A Weakening Of Volatility

Multiple bottoms within a single trading range indicate that the seller’s grip has weakened. Trading ranges generally don’t stay intact for long periods. As soon as buyers take control, the sellers return and start pushing the price lower again. So multiple bottoms within a trading range indicate that the sellers’ resistance is losing strength.

These constraints of the dragonfly Doji pattern should make your trading more effective by limiting the number of invalid setups. Once you understand these rules, you’ll be able to spot those ambiguous scenarios that are difficult to interpret.

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Raushan Kumar
A Cook, Software analyst & Blogger.


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