The doji candle is a technical indicator often used in stock market trading. It is a short-term market signal that usually indicates the beginning of a new trend. However, there are risks to using the doji candlestick. It may not indicate the end of the trend but rather the beginning of the reversal. Here, we take a look at the risks of using this candlestick.
It is not as reliable
The dragonfly doji candlestick is not as reliable as others. It is not a perfect indicator of an upcoming trend reversal. Even though it indicates the end of the trend, it does not mean that prices will automatically reverse direction or head back to the price range before the candlestick formation. In situations where prices are only slightly above or below the middle of the body, there is a high chance that it will head back to its middle price point. However, suppose prices have moved substantially away from their middle price point. In that case, there are better options out there, such as another technical analysis that helps determine whether or not a reversal is likely in place.
It is not very easy to find charts
You need to be experienced with trading tools and charts to find this doji candlestick on charts, especially when using price charts because it is more difficult to spot. You should already have a good understanding of how the patterns work and their background. If you are just starting, then it may be best to learn how the candle itself is made so that you can easily identify it. Other candlesticks will give similar signals, so it would be ideal that you study other traditional candlesticks and their meanings.
It is not very easy to tell when it is a reversal
If prices have moved substantially away from their middle price point, then there are usually better options that will make it easier for you to identify when the trend has reversed or ended. You could check if the RSI can be a guide in telling you whether or not the trend has reversed after using the RSI (Relative Strength Index) lines. It is also possible that you can use any other technical indicators that give information on market momentum after using them in combination with each other. However, testing them is the only way to know if they can help your trading.
You need to pay attention to other indicators as well
If using this doji candlestick is not sufficient, then it also pays to pay attention to other indicators for confirmation. These indicators include the RSI (Relative Strength Index) lines because this indicator can indicate whether or not the trend has reversed. You should also look for the various readings coming from your other technical analysis tools and signals to confirm that a reversal has taken place, especially if you have been using them in conjunction with one another.
Time frame matters
If you are trading a long/short straddle or strangle, then the time frame that you are trading on is also very important. It may be worthwhile to know the trend before going into the trade to avoid losses if trends reverse. You can plan your trades based on your time frames and know if the reversal will occur soon after it happens so that you can cut your losses before they get too big. It also pays to find out if there is at least one more candle after the doji that will confirm its reversal for better confirmation of a new trend in play.
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It is more likely to occur at the end of a trend
The doji candle is more likely to appear at the end of a breakout or reversal of a trend. You need to carefully study your charts before placing trades on them if you want to use this candlestick. You would be well-advised to learn about this pattern before you go into your trades simply because it will help you predict when the trend has reversed and that you can perhaps place your trades in time. It can also have other useful information, such as whether or not there are other doji candles already on the chart that will confirm its reversal.
It does not always indicate a reversal
It should also be said that this candlestick does not always indicate a reversal after all. As mentioned earlier, it is important to remember that it only means that the trend will reverse soon or has reversed. It is important to realize this fact because if you are using it alone, then there is a high chance of losing trades as well. You should treat it as a confirmation of the trend instead of relying on its signals alone. It pays to check other tools or technical indicators to know whether or not there will be a reversal after its formation so that you can cut your losses if need be.
It needs confirmation
It is good to use it in conjunction with other technical tools and indicators. If two consecutive doji candles have substantially different heights, then it is not uncommon to see a trend reversal. However, you should still be wary about this situation because it does not always mean that the trend will reverse.
It can have various interpretations
The dragonfly doji candlestick can give various interpretations depending on where it appears on the charts. For example, if you see one with a tall body but a small wick, such as in the picture below, it indicates a potential increase in supply even though there is an increase in demand.
Conclusion
The dragonfly doji candlestick may not be the most popular candlestick out there. Still, it has its uses in indicating whether or not a trend reversal is occurring on any given day. It cannot be used alone to determine if a trend has reversed, but it is best seen as an indicator of a potential reversal. If you are using other technical tools and indicators, you can make better trading decisions with them in conjunction. It makes sense for traders to understand when their trades work or fail because you can use this candle to your advantage.
