The Dragonfly Doji is a bullish candlestick pattern that traders use to identify potential trend reversals in the market. This pattern is characterized by a long lower tail and occurs when the open, high, and close prices are approximately the same. The long lower tail represents the resistance of buyers and their attempt to push the market up, indicating that the forces of supply and demand are approaching a balance. This suggests that the direction of the trend may be nearing a major turning point.
An example of a perfect Dragonfly Doji can be seen in the illustration below.
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The pattern provides a clear indication of where support and demand are located on the chart. When a Dragonfly Doji occurs in a downtrend, it is interpreted as a bullish reversal signal, indicating a potential change in market direction.
In the chart above, we can see an example of a Dragonfly Doji forming at a previous support level, which resulted in a strong rejection from the area. The formation of the pattern, with its long lower tail, suggests a high buying pressure in the area. However, it is important to note that traders should not rely solely on candlestick patterns such as the Dragonfly Doji when making trading decisions. Other indicators and tools should be used in conjunction to determine high probability signals in the market.