How is a Dragonfly Doji typically interpreted in trading?

A Dragonfly Doji is typically interpreted as a bullish reversal signal due to its specific formation and context within price action. It occurs when the open, high, and close prices are approximately equal, resulting in a candle that has a long lower shadow but little to no upper shadow. This creates a 'T' shape, indicating that the market opened lower, traded down to a significant low during the period, and then rallied back to close at or near the opening price.

In the context of market psychology, the long lower shadow suggests that sellers were initially in control, pushing prices lower, but buyers stepped in strongly enough to push prices back up to the open, demonstrating buying pressure. This shift in momentum can often indicate a potential reversal from a downtrend to an uptrend if it appears after a downtrend. Therefore, traders often view the Dragonfly Doji as an indication that the market sentiment may be shifting from bearish to bullish, making it a signal for potential upward price movement in the future.

This interpretation aligns with the characteristics of reversal patterns, which signify the potential end of an existing trend and the start of a new one.