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Tuesday, October 2, 2007

Understanding Candlestick Formation – Part 4: DRAGONFLY DOJI & GRAVESTONE DOJI

The following are some form of Doji candlestick (Cont’d):
(Please refer back to Part 3 for the pictures of each of the following formation)

3) Dragonfly Doji
Dragonfly doji is formed when the Opening and Closing price are at the High of the session (i.e. Open = Close = High) and the Low price creates a long lower shadow, resulting in a candlestick with a long lower shadow and no upper shadow (Looks like a "T").
Dragonfly doji indicates that sellers dominated trading and pushed the price lower in the beginning of session. However, towards the end of the session, buyers reemerge and drove the price back to the opening level and the session high. This signals a potential trend reversal.

Dragonfly doji may imply a trend reversal depending on previous trend and future confirmation.

After a downtrend, or during a pullback within an uptrend, or when it’s formed at the support, the appearance of Dragonfly Doji could signal that a turning point is nearing (i.e. potential bullish reversal).
Because when the price has been in a declining mode for some time, the ability of the price actions to rally back to its highest level after the sell-off at the beginning of session shows some evidence that the bulls (buyers) might just have begun to step in again.
The following day needs to confirm its bullish reversal signal with a strong bullish day (e.g. a gap up or a long white candle on a high volume).

After an uptrend, or a bounce within a downtrend, or when it’s formed at the resistance, the appearance of Dragonfly Doji could signal that a turning point is nearing (i.e. potential bearish reversal).
For a Dragonfly Doji to appear, the price must first trade much lower than where it opened, and then it rises to close at its high point at the end of the day. The long lower shadow formed shows some indications that the selling pressures might have just begun. Although the bulls managed to regain control and drove the price back to its highest level at the close, the appearance of selling pressure suggests some signs of caution. The next trading day needs to confirm its bearish signal with a strong bearish candle (e.g. a gap down or a long black/red candle on a high volume).

4) Gravestone Doji
Gravestone doji is just the opposite of Dragonfly doji.
Gravestone doji is formed when the Opening and Closing price are at the Low of the session (i.e. Open = Close = Low) and the High price creates a long upper shadow, resulting in a candlestick with a long upper shadow and no lower shadow (Looks like an upside down "T").
Gravestone doji indicates that buyers dominated trading and pushed the price higher since the beginning of session. However, towards the end of the session, sellers resurfaced and drove the price back to the opening level and the session low. This signals a potential trend reversal.

Gravestone doji may imply a trend reversal depending on previous trend and future confirmation.

After a downtrend, or a pullback within an uptrend, or when it’s formed at the support, the appearance of Gravestone Doji could signal that a turning point is nearing (i.e. potential bullish reversal).
Because for a Gravestone Doji to form, the price must first trade much higher than where it opened, and then it drops to close at its low at the end of the day. The long upper shadow formed shows some indications that the buyers (bulls) might just have started to step in. Although the sellers (bears) managed to regain control and push the price back at its lowest level at the close, the appearance of buying pressure raises some concerns.
The next trading day needs to confirm its bullish reversal signal with a strong bullish day (e.g. a gap up or a long white candle on a high volume).

After an uptrend, or a bounce within a downtrend, or when it’s formed at the resistance, the appearance of Gravestone Doji could signal that a turning point is nearing (i.e. potential bearish reversal).
Because when the price is has been in a rally mode for some time, the ability of the price actions to drop back to the lowest point after the rally in the beginning of session demonstrates some indications that the sellers (bears) might have begun to step in again.
The following day needs to confirm its bearish reversal signal with a strong bearish day (e.g. a gap down or a long black/red candle on a high volume).

Related Posts:
* Learning / Understanding Candlestick Charts
* Learning Charts Patterns

1 comments:

Tony Chai said...

Hi OTB :

Nice article to elaborate further on the doji candle stick patterns.

You are right to point out that it's necessary to monitor the candlestick patterns following the doji candlestick to determine whether it's a trend reversal or continuation pattern.

It's also important to keep track of upcoming major events (eg. earnings ) which could cause major candlestick gap up / down pattern which might not foreseeable from the day to day candlestick chart.

Yours Truly,

Tony Chai
My Options Trading Blog