Irrespective of the financial market you trade, it is crucial to make lucrative trading decisions. Likewise, the use of trading indicators for an intraday trader is simply unavoidable. However, it is well said that success requires more than a decent trading platform. While indicators aid in reading a trading chart and determining market ranges or trends, they help clients detect overbought, oversold, and reversal situations. In this piece, we discuss the Supertrend indicator in detail.
What Is Supertrend Indicator?
Founded by Olivier Seban, the Supertrend indicator produces precise buying or selling signals in a trending market. Plotted on price shows the current trend employing only two parameters: period and multiplier. Traders often consider it the same as other trend-following indicators, such as moving averages and MACD. However, it works much better across all time frames, including 1-Min, 5-Min, or 15 Min charts.
The Supertrend indicator strategy’s default parameters are 10 for ATR and 3 for its multiplier. In addition, the Average True Range (ATR) helps calculate the indicator’s value and signifies the extent of price volatility.
Changes to these data may impact the usage of the Supertrend indicator. Please note that no trading indicator has an optimal setting. Changing too many settings might result in a trading system that is over-optimized for the moment. Therefore, the less you change the settings for the indicator, the more productivity you can expect from it. Although more settings may reduce market noise, they can also reduce the reliability of the trading signals.
How does the Supertrend indicator work?
Like a Moving Average (MA), the Supertrend indicator is a trend-tracking overlay on a trading chart. Not to mention, it performs well in trending markets but can be misleading in range markets. Since the indicator employs the ATR to calculate volatility in the market, a trader should develop a strong understanding of the ATR first.
ATR is another indicator that measures market volatility by decompressing a security’s price range across time.
A true-range indication is the highest of these values: (current high – current low), (current high – previous close), and (current low – previous close).
To obtain the ATR, find the TR values for the series first, and divide them by the number of periods represented by n. Hence you get the actual range moving average.
So, we get the following equation by putting the abovementioned data into the ATR calculation.
This formula helps comprehend the indicator’s working procedure. First, ensure the super-trend indicator is configured correctly. Set Periods (ATR days) and adjust the multiplier accordingly. A multiplier is a number that increases ATR. Traders often employ ten for periods and a three for the multiplier. Prices adjustments are more responsive to shorter n values. Notably, there will be fewer signals to act upon if n is larger.
How to Setup the Supertrend indicator?
After installing it on your trading platform, you need to follow the simple steps listed below to set up the indicator.
Step 1: To trade a stock, open its chart.
Step 2: Set an intraday trading period of 10 minutes. Any standard charting software would work fine.
Step 3: Make your indication the super trend. You can set the figures to either 10 & 3 or use your custom configuration.
Step 4: Now start tracking favourable indications.
Step 5: You may also use the arrows to purchase and sell stocks.
How to trade using the Supertrend indicator?
The Supertrend indicator helps you perform solid technical analysis on any stock. You can also have confirmation of trend and decide whether to go long or short using this indicator. Since it works best in a trending market, determining an up or downtrend in any market shouldn’t be difficult.
However, do not forget to employ the stop-loss feature while opening a position based on the Supertrend indicator. Using the indicator line for a stop-loss would be even better. Moreover, you can trail it irrespective of the price direction. If you want to go long, place your stop loss at the green signal line. In another scenario, put it on the red line.
The indicator’s primary purpose is to produce traders’ buy and sell signals. It exhibits changing patterns via flipping. When the stock price exceeds the indicator value, the indicator turns green and signals a buy. Similarly, a sell signal is received when the price falls below the indicated value, leading the colour to turn red. The indicator catches intraday patterns fast. While using it, keep the default settings of 10 and 3. Trying to lower the settings may result in false indications.
Undoubtedly, using the Supertrend indicator combined with your stop loss pattern is the most fantastic strategy to make money effectively.
Things To Consider While Trading With Supertrend Indicator
You may utilize this indicator on different time frames for entry and exit signals. i.e. starting with a larger timeframe and working your way down to lower time frames. Swing and position traders might employ more extended periods. However, the 15-minute should be the smallest period for using the Super trend indicator.
Pros and Cons of Supertrend Indicator
Like all other indicators, the Supertrend indicator also has some pros and cons of using it. Let us quickly enlist a few of them below.
Pros
The Supertrend indicator is well-known for producing accurate signals with default settings. Hence it appears to be one of the most reliable indicators.
It produces precise signals, enabling traders to make appropriate trading decisions fast.
The indicator is quick to set up, easy to understand, and simple to use.
Supertrend indicator is widely available across multiple platforms. Mostly, traders can download it for free.
It helps clients to perform quick technical analyses to find profitable trading opportunities.
Cons
The Supertrend works well in a trending market but can be ineffective in a range market. That means it doesn’t necessarily work every time.
The indicator employs only two parameters, including multiplier and ATR, which might not be sufficient in different trading conditions for predicting the market direction reliably.
Conclusion
The super-trend indicator works best in markets with unambiguous price patterns. In sideways markets, it may cause misleading signals, inciting erroneous trades. It is used with other indicators like moving averages and MACD for more efficient signals. Aside from the Supertrend indicator, no technical analysis tool works perfectly. Nevertheless, you may make wise selections and benefit handsomely. False signals occur from time to time using the Supertrend but are less often than produced by other indicators. Hence, using it in combination with other indicators is recommended.
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Candlestick is the frequent term you encounter while trading stocks or forex. A candlestick chart shows an underlying asset’s open & close prices, the high & low for a timeframe (i.e. minute, hour, day, month). While performing technical analysis might require a strong understanding of multiple candlestick patterns, Doji patterns are common. The Long-legged Doji is also one of them. In this piece, let’s discuss the long-legged Doji candlestick pattern and how to trade it.
What Is Long-Legged Doji?
The long-legged doji is a candlestick with long upper and lower shadows and a small body. It is one of the four doji stick candles, including neutral, gravestone, dragonfly and long-legged. All these candles have one thing in common – their tiny body. When a candle opens and closes almost on the same level, it makes a small body known as Doji.
What Does Long-Legged Doji Indicate?
The pattern shows indecision and is most notable after a sharp rise or fall. In other terms, a long-legged Doji indicates uncertainty about the security’s price direction. If price forms a long-legged Doji before breaking out into a new trend, it may signify that the consolidation phase has begun.
Long-legged Doji holds critical significance when they occur amidst a strong up or downtrend. With supply and demand nearing equilibrium, a trend reversal is possible. Because the price has reached equilibrium or indecision, it does not move in the same direction, while the market sentiment may change.
The price is pushed higher and closed above the opening for most periods in an uptrend. Unlike previous periods when buyers were in charge, the long-legged Doji shows a battle between buyers and sellers that ended in a tie. Not to mention, the pattern appears in all time frames but is more significant in longer-term charts where more participants contribute.
Examples of Long-legged Doji
The chart below shows some long-legged dojis in a daily chart.
On the left, the price falls and forms a Doji. After then the price consolidates and rises but fails to gain traction and falls again. Since the price falls, the long-legged Doji appears, leading to the beginning of the consolidation period once again. The price rises above the consolidation. However, the long-legged Doji foreshadowed the market’s consolidation or indecision before the upward reversal.
On the right side, the price falls. Later, the long-legged Doji forms, dropping below the consolidation low before rallying to close within the consolidation and then rose. Notably, this time the body of the Doji appears slightly significant than the previous ones.
How to Identify Long-legged Doji?
You can follow the instructions below to locate the long-legged Doji candlestick on a price chart.
Ensure that the Doji candlestick’s beginning and closing prices are the same.
Doji candlesticks should have extended higher and lower shadows.
The size of the lower and upper shadows should be roughly equal.
Long-legged Doji in Uptrend
When the bearish Long Legged Doji has long shadows on both ends in an uptrend, it suggests buyers and sellers are indecisive, leading to a bearish reversal. In such a scenario, the market is bullish and trending upwards. Then a Long Leg Doji appears, bucking the trend.
Long-legged Doji in Downtrend
Like uptrend, long-legged Doji has very long shadows on both sides in a downtrend as well. Since buyers and sellers are indecisive, it indicates a bullish reversal. This pattern depicts a bearish market in a downtrend. Then a Long Legged Doji appears and gaps the trend. Not to mention, the next day’s trend must reverse to confirm this pattern.
Trading the Long-legged Doji
How to trade long-legged Doji?
While there are different methods to trade the long-legged Doji, entering positions based on it isn’t necessary. Given that the price moves a little on a closing basis, some traders believe that one candle pattern isn’t significant enough to warrant a trade decision.
On the other hand, some traders prefer to wait until the price moves after the appearance of the long-legged Doji. Notably, long-legged Doji can form a significant consolidation or appear in clusters. The previous trend may be reversed or continued depending on how the price breaks the coalition.
Initiating a Long-legged Doji Trade
Before entering a position, you could wait until the price moves above the long-legged Doji’s high or low. If the price rises, then go long. On the other hand, if the price falls below the pattern, go short. Alternatively, you can wait for a consolidation to form around the long-legged doji before going long or short. The long-legged Doji pattern is more likely to be valid if it appears near a major resistance or support.
Let us share some other methods to trade Long-legged Doji below.
Moving Average: The appearance of the long-legged Doji piercing the moving average after you apply a 50 or 200-day moving average is a positive indicator that price could break or rebound through the moving average.
Bollinger bands piercing: You can also trade the long-legged Doji with Bollinger bands. In this case, the Dojis tend to break through the Bollinger bands (Upper or Lower), indicating a reversal if a candlestick closes in the other direction. Not to mention, you must consider the width of Bollinger bands before trading them.
Support & Resistance: This candlestick pattern often appears at important support and resistance levels, indicating price decline. Eventually, the price tested support and resistance but couldn’t close higher. Therefore, if the following candlestick pattern forms, you could expect a support or resistance level reversal.
Long-legged Doji – Other Considerations
Profit Targets
Long-legged Dojis have no profit targets attached, so traders must devise a way for doing so. For example, you could use technical indicators or exit based on the best exit points in your backtest. Using a fixed risk/reward ratio which worked well in testing, could also help keep things simple and efficient.
Risk Management
Risk management is essential when trading long-legged Doji or any other technical indicator. Besides carefully defining a risk-reward ratio, using a stop-loss is also vital. Since long-legged Doji can also lead to false information, a tight stop loss would help reduce risk. Place a stop loss below the long-legged doji or consolidation if going long. On the other hand, put your stop loss above the long-legged doji or consolidation if you’re going short.
Conclusion
A long-legged Doji candlestick represents indecision and signals market uncertainty. Its occurrence in price behaviour can indicate a variety of factors. Possibly, it could indicate a price reversal from the preceding trend. On the other hand, it could also mean that the market consolidates before breaking out in the prevailing trend’s direction. As a result, the long-legged Doji candlestick should never be evaluated in isolation but rather in conjunction with all other elements of your strategy.
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Understanding candlestick patterns is critical in technical analysis, and there are over 30 candlestick patterns. However, Doji candlestick patterns are the most common. While Doji Candlestick patterns can help traders make informed decisions, they can sometimes lead to false information. This piece will explain the Dragonfly Doji candlestick pattern, its components, how to trade it, and its limitations.
What Is Dragonfly Doji?
The Dragonfly Doji is a bullish reversal candlestick pattern usually formed at the lows of downtrends. Besides enabling traders to see support and demand, it can help investors detect an uptrend when coupled with other indicators. The Dragonfly Doji candlestick appears when the open, high, and closing prices become almost identical. The Dragonfly’s long lower shadow reflects that aggressive selling occurred during the underlying time that buyers counterfeited as the price closed near its origin.
What Does Dragonfly Doji Indicate?
After a downtrend, the Dragonfly Doji candlestick indicates that the price may rise. On the other side, the uptrend anticipates more sellers entering the market. Therefore the price could decline.
In either case, the candle that follows the Dragonfly Doji must confirm the market direction. The Dragonfly’s long lower shadow suggests that sellers had control for part of a price advance. While the price remained unchanged, the increase in selling pressure triggers a warning sign that the price trend might change. The candle appearing after a bearish dragonfly must confirm the reversal as it closes below the dragonfly candle. The reversal signal is invalidated if the price tends to rise on the confirmation candle.
Using Dragonfly Doji in conjunction with other indicators is best, as the candlestick patterns can indicate both indecision and reversal. Unreliability is associated with low volume Dragonfly Dojis. The confirmation candle should have a high price and significant volume.
Another possibility is that the Dragonfly Doji appears at the end of a head and shoulders chart pattern. Anyhow, traders should not entirely depend on a single candlestick pattern in any case.
Dragonfly Doji Examples
Since it is rare for a candle to have open, close and high prices to be almost in the same area, Dragonfly Dojis are not very common. Usually, all three prices do have minor differences. For instance, given below is an example of a Dragonfly Doji appearing in the sideways of a long-term uptrend. As the Dragonfly Doji moved lower, buyers quickly swept it higher.
The price moved higher after the Dragonfly Doji appeared, confirming the price retracement. Traders usually buy or sell their positions after the appearance of the confirmation candle.
Traders can witness the Candlesticks’ versatility as a slight drop in the price followed by a push higher confirmed the price was likely to rise further. Not to mention, the dragonfly pattern and the confirmation candle signaled the end of the short-term correction and the start of the uptrend.
This candlestick pattern implies different meanings when it appears in an uptrend or downtrend. Let’s discuss it below.
Dragonfly Doji in Uptrend
In a bullish trend, Doji candles always signal danger. A Dragonfly Doji candle appearing in an uptrend shows uncertainty in the market. It indicates a 50% price reversal or range before continuing upward movement. The next candlestick on every chart should confirm the Dragonfly Doji candle price action.
In the image below, a daily bearish Dragonfly Doji indicates a price reversal.
A bullish Dragonfly Doji followed a bearish one on a daily chart and prevented the price from falling. As a result of the candles’ strengthening, the price kept rising.
Dragonfly Doji in Downtrend
The downward trending candlestick is defended and pushed up by bulls to close almost precisely on the opening price. Thus, a Dragonfly Doji candle can signal price exhaustion and reversal. Also, it is pertinent to note the point when the candle appears since its formation near support could be a specific support level such as Fibonacci level, moving average line, historical support level, or Bollinger Bands lower band.
As seen in the image below, a daily bullish Dragonfly Doji showed a price retracement before continuing to fall.
A daily Bearish Dragonfly Doji formed below the support line, but the price did not retrace.
Trading the Dragonfly Doji
How to Trade a Dragonfly Doji?
As discussed above, It is rare for Dragonfly Doji to appear on charts. Therefore, it is comparatively difficult to open or close positions based on Dragonfly Doji candles. There is always a risk that traders might get confused while identifying the Dragonfly Doji. Mixing it up with a hammer candle or hanging man candle can lead investors to false interpretation. A T-shaped candle having a small body indicates that the price dropped below the opening price but closed on the same level after reverting.
Confirmation of Dragonfly Doji
Paying close attention to the candle appearing next to the Dragonfly Doji is crucial. For instance, a hanging man candle in an uptrend offers a high probability of reversing the price trend. However, be cautious since the price reversal pattern can also be false positives when appearing in higher time frames.
Upon reaching a resistance level, the formation of the Dragonfly Doji might indicate a temporary price reversal, but you should check it with further price action for confirmation.
Initiating a Dragonfly Doji Trade
Entering a position based on Dragonfly Doji carries increased risk since it signals the market’s uncertainty. Therefore, you must not forget to incorporate stop-loss while initiating a trade and open a position only after the appearance of the confirmation candle.
Difference Between Dragonfly Doji and Gravestone Doji
There is no difference between the practical implication of Dragonfly Doji and Gravestone Doji, as both suggest price trend reversals followed by confirmation candles. However, they look like opposite of each other. Dragonfly Doji is T-shaped with a long lower shadow, while Gravestone Doji appears as an inverted T with a long upper tail.
Limitations of Dragonfly Doji
Initiating trades based on Dragonfly Doji can be tricky since it only appears occasionally. Also, there is no assurance the market might move in the anticipated direction even after the appearance of a Dragonfly Dogi and the confirmation candle. Hence, relying on a less common technical indicator for spotting price trend reversal isn’t worth it.
Because of the magnitude of the Dragonfly Doji and the confirmation candle’s size, the entry position for a trade can be a long way from the stop-loss. It implies traders will either need to relocate their stop loss or abandon the trade position because a large stop-loss is less likely to justify the potential gain.
Secondly, you can’t estimate the potential gain reliably since Dragonfly Doji doesn’t help you define price targets. However, it will help incorporate other technical indicators and candlestick patterns while profitably exiting a trade.
Conclusion
Doji patterns imply a price transition or the market’s uncertainty about the future direction of pricing. Instead of a continuation or reversal pattern, these patterns are better classified as transitional candlestick patterns as a whole. Specific patterns, such as the Gravestone Doji or the Dragonfly Doji, indicate a potential price reversal, but they work best with other technical indicators.
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Whether you trade forex or stake your interest in the stock market, It is pertinent to make appropriate trading decisions to remain profitable. Besides a good trading platform, a set of valuable indicators are crucial for your success. Undoubtedly, indicators help you read a trading chart and understand if the market ranges or follows a trend. Technical indicators also assist clients in identifying when an asset is overbought, oversold or due for a reversal. In this piece, we discuss one of the popular technical indicators (KDJ) indicator in detail.
What Is KDJ Indicator?
KDJ is a technical indicator that helps traders to forecast stock trends and changes in their price patterns. It is sometimes also referred to as a random index. Mostly, traders use it to perform short term trend analysis. Besides assisting you to identify trend direction, it also helps you find optimal entry points.
Image Source: https://www.mql5.com
Besides comprising three lines K, D, and J, the KDJ indicator has two price levels: the highest and the lowest. For period calculation, the indicator incorporates both price levels besides accounting for the amplitude of fluctuations in the prices. Hence the indicator is believed to reflect price fluctuations reasonably well. In the KDJ index, the fastest index is K in yellow, the slowest is D in blue, and J is the medium index with a red line.
KDJ index values range between 0-100 for K and D, while the value for J can be less than 0 or more than 100. However, the software incorporates KDJ values between 0 and 100 for research and analysis.
The value for J is more sensitive than K, with D being the least sensitive. On the other hand, D possesses more stability while K and J values rank at 1 and 2, indicating the latter being less stable.
With the KDJ indicator, investors mainly try to understand the relationship between an underlying asset’s highest, lowest, and closing prices. It also employs some merits of strength indicator, momentum concept, and the moving average. Therefore, it becomes pretty easy to judge the market conditions using the KDJ indicator.
How Does It Work?
KDJ indicator is all about identifying random price fluctuations and works best for short and medium-term analysis in a trending market. However, the K-line chart also predicts the price trend pretty well in a more extended time frame. For instance, on the weekly chart, the KDJ indicator’s mid-line operation works much better.
While the K and D lines look similar to the lines used in the Stochastic Oscillator, the J-line reflects the bifurcation of the D’s value from K. When these lines converge, you can anticipate a new trading opportunity.
How to Setup the KDJ indicator?
The KDJ Indicator is a technical indicator that transforms historical data. With KDJ, clients can detect hidden patterns and peculiarities in price dynamics that a human eye could hardly see. Traders must adjust their strategy based on the information acquired from the KDJ indicator.
Given below are the simple steps to help you set up the indicator.
Download the KDJ MT4/MT5 Indicator on your PC. You can easily find it over the internet.
After installing it, sign in to the MetaTrader platform and open the data folder by clicking on the file menu.
Access the MQL4 folder and paste it into the indicators folder.
Restart the Metatrader 4/5 Client.
Choose a chart and timeframe to test the KDJ indicator.
How to trade using the KDJ indicator?
With KDJ indicators, traders mainly look for buy and sell signals. Based on the values of the KDJ indicator, there are three different zones, including oversold, overbought, and wandering zone.
When the value of KDJ decreases below 20, they fall in an oversold area. Similarly, values exceeding 80 hit the overbought zone.
KDJ indicator generates a sell signal when the three lines intersect above an overbought level. In such a scenario, the blue line remains on top while the yellow line comes in the center, and the red one stays on the bottom. Similarly, a buy signal is received when all three lines coincide below an oversold level following the same sequence.
Not to mention, when the values for the KDJ indicator hover between 20 and 80, you should wait for the confirmation signal.
Levels being overbought and oversold indicate reversal points. While these levels have a default value of 80 and 20, you can tweak them for more sensitivity to get a fair indication.
Things To Consider While Trading With KDJ Indicator
It is best to use the KDJ indicator with other indicators, such as the Average True Range (ATR) and Average Directional Index (ADX).
The Average Directional Index (ADX) indicates a possible trend reversal. Since KDJ is less likely to work under extremely volatile markets, ATR can help you determine the market’s volatility with some reasonable assurance.
Remember, indicators can only help you find a possible value and don’t offer 100 percent confirmation. Therefore, it is crucial to employ an appropriate capital injection followed by advanced risk management tools.
Pros and Cons of KDJ Indicator
Like other indicators, KDJ also has some pros and cons that are listed below.
Pros
KDJ indicator is simple to understand and easy to interpret
It works best when used with other indicators, such as Stochastic Oscillators.
It is ideal for identifying changes in price trends and finding optimal entry points.
Cons
KDJ indicator doesn’t work in a highly volatile market.
It sometimes offers misleading information.
Conclusion
The KDJ indicator is pretty helpful to determine trends and identify entry points. However, the indicator can sometimes lead to false information just like every other technical indicator; hence shouldn’t be relied upon in absolute terms. It is better to use it with other technical indicators to form a more reasonable trading decision.
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Candlestick patterns hold critical importance in technical analysis, and understanding them well is crucial. While there are more than 30 candlestick patterns, Doji candlestick patterns are known to be used more frequently. However, traders usually struggle to employ them effectively either due to lack of knowledge or misinterpretation. In this guide, we’ll discuss one of the popular candlestick patterns – Gravestone Doji. Besides helping you know how it works, we’ll also explain how to interpret it. At last, we’ll also discuss some limitations of the Gravestone Doji pattern.
What Is Gravestone Doji?
Gravestone Doji is a bearish pattern that indicates a price reversal and a subsequent downtrend. It alerts traders to book a profit on the bullish positions before the trend turns bearish. The pattern forms when the underlying asset’s opening and closing price becomes equal. It has a long shadow on the upper side that indicates sellers resisted the day’s buying pressure and that supply and demand are in equilibrium.
What does a Gravestone Doji indicate?
A Gravestone Doji pattern indicates the bearish reversal. The pattern does not necessarily need opening, closing, or low prices to be the same for its validation. However, Gravestone Doji’s small tail help traders not to confuse it with other patterns like the inverted hammer, spinning top, or shooting star. The market portrays that the bulls push the prices to go higher, while bears keep pulling the prices back to the origin.
Gravestone Doji’s upper long shadow implies the bulls are becoming weak. Not to mention, the Gravestone Doji can appear near a downtrend end, but it is more common in an uptrend. Despite being famous, the Gravestone Doji comes with reliability concerns as it is common with other visual patterns as well. Traders often ignore Gravestone Dojis until the confirmation candle shows up and signals a reversal.
Gravestone Doji examples
Gravestone Doji can appear in both uptrend and downtrend. Let us explain either case using a simple example.
Gravestone Doji in Uptrend
Gravestone Doji is more likely to be formed in an Uptrend top. When it appears in an uptrend, it is considered unfavorable for the bullish market. That’s because it suggests the bulls are becoming weaker, and the bears are likely to come into play who will start pulling the price downward. Ideally, when a Gravestone Doji appears at the top of an uptrend, you should get ready to exit a trade before it is too late and the bears take control.
Gravestone Doji in Downtrend
Whether a Gravestone Doji appears in an uptrend or downtrend, it is always a bearish candlestick pattern. Therefore, you must not get confused. The appearance of a Gravestone Doji in a downtrend suggests that a trend might continue or move sideways and market range. Remember, a Gravestone Doji in a downtrend shouldn’t be considered a bottom confirmation since the market may continue descending further.
Trading the Gravestone Doji
How to trade Gravestone Doji?
Always consider trading Gravestone Doji for some confluent reasons. Although candlestick analysis is a powerful tool for effective trading, it works best when combined with other indicators, such as Fibonacci levels, moving averages, horizontal support and resistance, momentum analysis with RSI, MACD, and CMF, etc.
After identifying a Gravestone Doji, wait for the confirmation candle and the low of Gravestone Doji to break down. The simple method to trade Gravestone Doji is to enter a short-term position. Remember, you should initiate a trade only when the low of Gravestone Doji breaks since if it keeps holding there, the market might start rising further.
Managing risk while trading with Gravestone Doji
Do not forget to place a stop loss while entering a position based on Gravestone Doji. It will help you limit your loss if the market moves against you. It is best to place a stop loss a little higher than the shadow of the Gravestone Doji. Not to mention, your risk levels may vary depending upon the wick size of the Gravestone Doji. It could either be too small or too large for you to be comfortable.
Essentially, placing a tight stop-loss could get caught by stop hunters, while a stop-loss set too far brings more risk. Therefore, you can use volume profiling to identify the appropriate stop-loss point.
Setting up target profits while trading with Gravestone Doji
While appropriate timing holds critical importance for trade placement, you are less likely to be profitable if you miss an exit plan for your positions.
When trading with Gravestone Doji, it is best to use the candle wick to exit a position. Your first target profit should be equal to the size of the Gravestone Doji candle, while you can have it double the size of the candle for the second take profit.
Drawing Fibonacci levels to match the appropriate potential spot or incorporating support and resistance levels can also help. Moreover, you can employ other methods like TD sequential or Elliott wave and use their exit points in conjunction with the Gravestone Doji to have the best results.
Setting up a Stop loss on Continuing Trades
There could be a scenario where the market seems to be moving well in your favor, and you wish to switch from scalping to a long-term position. In such a case, you need to recalculate your stop level and place it a little lower or higher than your current stop level so you can avoid losing profits. However, modifying a stop-loss in continuing trade is not recommended. It can have serious consequences in highly volatile markets like cryptocurrency. If you are new to trading, it’s better not to think about it.
Difference between Gravestone Doji & Dragonfly Doji
Dragonfly Doji is the inverse of Gravestone Doji. Despite their differences, they have a common mechanism. An almost-identical closing, opening, or high of a trading session creates a Doji. While Gravestone Doji looks like an inverted T, the Dragonfly Dogi looks similar to a “T.”
Both can be bullish or bearish, but they can also be the opposite. A bullish dragonfly can precede an upswing, whereas a Gravestone Doji can precede a downturn. Both patterns necessitate volume and a second candle. Instead of pure bearish or bullish signals, you should consider both formations as visually uncertain representations.
Double Gravestone Doji
The appearance of a double Gravestone Doji indicates that bulls are significantly weak, and the market is turning bearish. After a low of two Gravestone Doji breaks, the market descends abruptly. However, instead of entirely depending on the Gravestone Doji, you should consider using other indicators such as RSI, MACD, Bollinger bands, Fibonacci levels, and Moving Averages, etc., in conjunction with the Double Gravestone Doji. It will help you decide more precisely whether to exit a trade in anticipation of a bearish market ahead or wait for bulls to retreat. Not to mention, the significance of the confirmation candle can’t be overlooked either.
Characteristics of the Gravestone Doji
Gravestone Doji pattern is one of four Doji candlestick patterns, including Common Doji, Gravestone Doji, Dragonfly Doji, and Long-Legged Doji. Being visually different from other candlestick patterns, it is easily identifiable.
Gravestone Doji’s most distinguishing characteristic is the long upper and lower wick with a tiny candle’s body that looks representing the open and closing prices being almost the same.
When a Gravestone Doji appears at the end of a strong uptrend, it becomes compelling. Generally, you may notice intense price action bursts pushing the price of underlying security into the uptrend. These uptrends are likely to have no pullbacks.
The Gravestone Doji suggests a temporary pause or even a possible reversal if such a trend appears. Undoubtedly, the emergence of a Gravestone Doji near a rally’s top-end or close to a resistance level makes it more viable. Not to mention, the Gravestone Doji can appear in either case.
Significance of Gravestone Doji’s Location
Remember, the location of the formation of Gravestone Doji is critically essential. A Gravestone Doji appearing on a dominant resistance level is far more significant than the pattern emerging on the chart anywhere else. Therefore you should avoid trading Gravestone Doji unless it appears in the position mentioned above. For instance, amongst the two Gravestone Doji appearing in the image shared below, the 2nd Gravestone Doji holds more significance since it forms on precise resistance levels. On the other hand, the Gravestone Doji appearing in the middle of the chart doesn’t make any sense. Hence, if you had to place a sell trade, you would have certainly put it near the second Gravestone Doji.
How to Trade Gravestone Doji In a Range Market?
Since possible selling pressure comes around a resistance level, you should short your position. That’s because the market signals the rejection of higher prices and indicates a lower reversal, just like shown in the image below.
How to Trade Gravestone Doji In a Trending Market?
The market usually bounces off in a healthy or strong trending market. Therefore, you should consider going short when the price of an underlying asset pulls back towards the Moving Average forming a Gravestone Doji, as you can see in the attached image.
Gravestone Doji – Limitations
Gravestone Doji candlestick in an uptrend may signal the end of a bullish phase and the beginning of bearish forces. It can help traders to plan for getting out of trades with profit. However, it doesn’t necessarily mean that a trend has changed. Traders must wait for the next candle to form before making a move. It can easily represent market indecision, and then the market can rise. The Gravestone Doji works best when combined with other technical indicators.
Pros and Cons of Gravestone Doji
Given below are some pros and cons of employing Gravestone Doji;
Pros
Gravestone Doji is easily identifiable.
It is one of the powerful bearish reversal candlestick patterns.
Traders can use it in conjunction with other indicators.
Cons
It can form a mid-trend becoming least helpful.
It usually does not appear in high time frames.
It shows the market fluctuations and could continue the trend or get a reversal.
Key TakeAways
Let’s review how you can identify and trade the Gravestone Doji using quick bullet points:
1) An upward trending Gravestone Doji pattern usually occurs at the bullish trend’s peak.
2) The bulls drive the security to an indefensible level, that the bears take control. Traders say this pattern resembles a bull gravestone’s side profile.
3) You should sell the stock after a candle gets closed below the Gravestone Doji’s tiny body.
4) Never trade gravestone Doji without a stop loss. Also, it would be better to place the stop-loss above a candlestick’s peak.
5) When trading the Gravestone Doji, you have 02 profit targets. For larger Gravestone Doji candles, allow the price to become equal to the formation size. Secondly, targeting profits twice the Gravestone Doji’s size works better with a smaller Doji candle.
6) If the market continues to trend in your favor, be patient. Set your stop beyond the target. Keep trading until two bullish candles appear. This suggests the bearish move is over.
Conclusion
Undoubtedly, Doji candlesticks are one of the most common reversal patterns, and the Gravestone Doji is one of its variations. When identified and confirmed appropriately, Gravestone Doji can lead traders to explore profitable opportunities. However, as with any other strategy or pattern, it takes time to identify an edge and master it. It is best to test your strategy using a simulator first and practice well before trading on the live market.
Gravestone Doji doesn’t always reflect profitable opportunities. Despite indicating a price reversal reasonably well, it still needs to be used properly in line with other elements of your strategy. Remember, do not make conclusive decisions based on Gravestone Doji alone. Instead, it is best to use it in conjunction with other tools, indicators, or price action confirmations of your strategy. There are plenty of tools available today to help your way to profitability. Since you’re familiar with Gravestone Doji now, identifying it and using it in your trading shouldn’t be a problem for you. However, sound knowledge of trading is not the only major constraint for traders. Instead, most beginner traders struggle from the pressure of wanting to flip their accounts fast mainly due to having a relatively small amount of capital to start trading. In turn, this affects the performance of traders negatively more often. If you’re a trader struggling with a lack of capital, you can check the funding solutions offered by Traders Central and choose an option that suits you whether it’s the challenge model or instant funding depending on your preference. This will help you eliminate the pressure of wanting to flip accounts fast and give you peace of mind to simply focus on your trading craft only.
