Gravestone Doji: The Ultimate Guide (UPDATED 2020)
Gravestone Doji – The Ultimate Guide
Therefore, not making it a common chart pattern to learn about.
With that said, we feel that it is a major chart pattern because it can signal a change in trend.
In this quick 10-minute guide, we’ll get you to an expert level of understanding on identifying a Gravestone Doji chart patterns and how you can use them to capture more profits.
What is a Gravestone Doji
A gravestone doji is formed when the sellers in the market have essentially managed to push the session’s candlestick from a session high back to the sessions open price.
(A trading session is the price range within a certain time. For example, 1-week, 1-day, 30 minutes…)
Wikipedia defines the chart pattern as: “the long upper shadow suggests that the direction of the trend may be nearing a major turning point. It is formed when the opening and closing price of the underlying asset are equal and occur at the low of the day.“
The gravestone doji is confirmed when the low, open and close prices are equal, or very similar, whilst there is a long wick which has created a session high.
The longer the wick, the more meaningful the move can be.
Just think of the buyers being able to continue a trend higher to a particular high in the market.
Then, with the price being high, a high volume of sellers/profit-taking could have entered the market moved the session’s price back downwards to it’s open.
This is important because it shows that sellers have returned to the market, which as a trader, will allow you to act accordingly.
One crucial aspect to look out for when trading is to only act when the candlestick pattern has been validated by the session close.
It is well-known for amateurs to identify a gravestone doji in an open trading session, so they usually trade as soon as they identify it.
Unfortunately, because the candlestick pattern is not validated (by the session closing and forming the actual pattern) they frequently get stopped out.
What Does A Gravestone Doji Mean?
The gravestone doji candlestick pattern is a bearish trend reversal indicator.
The importance of the gravestone doji chart pattern is that it doesn’t appear too often, in comparison to other candlestick patterns.
This can enhance its efficiency as a trading indicator.
A gravestone doji can develop at any time during a trend, nevertheless, it doesn’t always suggest that the trend is confirmed to reverse because of this gravestone doji chart pattern emerging.
With that said, usually, the gravestone doji appears at the top of an uptrend or where the price has gained resistance and is caused by a loss of momentum from the buyers and an entrance in more volume from the sellers.
This is used as an early indicator highlighting that the trend will reverse downwards.
You must also respect time as a circumstance, and candlestick patterns on various time frames weaken or increase its signal strength.
For example, if you saw a gravestone doji on a 1-week chart, that will provide a stronger indication of a reversal, much more than a gravestone doji appearing on a 15-minute chart.
How to trade Gravestone Doji
Trading the gravestone doji chart pattern is super simple.
Once you have identified a valid gravestone doji candlestick, it will signal that a change in trend could occur.
To trade this, you must approach it like any other candlestick formation which is to only trade the pattern around areas of confluence such as:
- Reacting from the Resistance Level
- Reacting from the resistance of a moving average
- Reacting from the resistance of a lower Bollinger band
- Reacting from the resistance of a Fibonacci level
Plus many more…
Trading the gravestone doji candlestick pattern alone can lead to lower quality trades, whereas combining the indicator with a resistance level will increase its validity as a reversal signal.
The gravestone doji by itself doesn’t always justify a selling signal, rather it indicates that there is a reversal potentially coming.
Let’s look at an example of a gravestone doji with a resistance level.
The gravestone doji can emerge anywhere during a trend which is due to the buyers and sellers indecisiveness of where they want to take the market.
This opens up to two types of selling signals, a weak signal, and a strong signal based on where the patterns appear.
Gravestone Doji In an Uptrend
If a gravestone doji has appeared in an uptrend, this can be considered as a strong signal due to the spike of participants moving from buying to selling the market.
A gravestone doji in an uptrend that is validated by the market is strong because the sellers were able to get the market lower from the session high pulling it down to its open price when the previous session have been bullish.
This shows the momentum may have switched.
Gravestone Doji in a Downtrend
When a gravestone doji in a downtrend appears it is believed to be a weak signal or a continuation pattern as the sellers still managed to be active.
However, the sellers were unable to create a new session low, this is why it can be seen as a weak signal.
With that said, as a continuation pattern, it shows that sellers are still participating and may, develop another entry level to add more capital to their trade or use it as an entry level to enter the current trend.
As the gravestone doji had formed in a downtrend, that means the sellers are in control, therefore for the buyers to enter and try to close the price lower is considered a weak signal too.
To trade the Gravestone Doji is straight forward:
Step 1: wait for validation – we must wait for the session to finish/close before we can confirm it’s a valid signal.
Step 2: place an order on the low/close of the gravestone doji candlestick or open a market order once the candlestick has closed.
Step 3: Place stop loss at the high of the candlestick. If the market pulls back towards the doji’s high and trades higher, then this rejects the bearish signal and you would take a small loss.
Step 4: Take profit is always open to each trader, so this depends upon your risk management.
Normally, you can exit a trade at the next support level.
As simple as that.
Examples of a Gravestone Doji
Let’s go over some examples of some gravestone doji formations and how they emerge and how they can be used as reversal signals.
Strong signal in an uptrend.
In the example above, you can see that the candlestick pattern formed precisely, and the market reversed as expected.
Strong signal with the resistance level
In the above example, the resistance level provides confluence with a validation of the chart pattern. This example demonstrates that sellers have returned to the market and that price was rejected at that previous resistance level, therefore, two strong indications that the price could reverse.
Strong Signal with Bollinger Band Resistance
In this example, just like with a resistance level we see the gravestone doji reverse the higher prices. In addition, the candlestick responded to the higher Bollinger Band which meant that the price was 2 standard deviations from the mean (red moving average), which indicates that the price will potentially revert to the mean in the near future.
A weak signal in an uptrend
In this example, we demonstrate a weak/continuation example. As you can see that after the pattern formed, it continued the trend downwards.
Sometimes, these patterns don’t always work…
Below is an example of the dojis appearing during an uptrend and unable to cause a reversal.
Wrapping Up The Gravestone Doji Guide
The gravestone doji candlestick pattern is a bearish trend reversal indicator that you should learn.
It’s a unique candlestick pattern and identifies a potential sudden swing in momentum to the downside. This pattern can be important if you are a swing trader, or looking to exit a trade.
Although these patterns are infrequent, when they have appeared, they can provide a strong bearish trend reversal signal – especially if they are used with another indicator or resistance level.
Or most commonly in the smallest of time frames – 15-minutes to tick level time frames. This is due to the trading sessions being very small.