The dragonfly doji is related to the hammer pattern, and the high wave candle. It is the opposite of the gravestone doji. Like all doji, the dragonfly doji has a small real body. Also, this candle must have a very long lower shadow. Finally, there must be little or no upper shadow.
Ideally, the dragonfly doji forms after a long downtrend, as this is a bullish reversal signal. Here is an example of this pattern in action:
Essentially, the psychology behind this pattern is that the bears are firmly in control intra-day, but the bulls take back control of the stock (or index) and close it very close to the opening. This shows a victory of the bulls over the bears.
Here is a closer inspection of the battle that took place:
Another bullish aspect about this formation was that the bulls actually managed to close the Dow over its 200dma, which added even more bullish evidence of a reversal. By the way, I identified this pattern in real time on my main blog in this article.
