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;
Gravestone Doji is easily identifiable.
It is one of the powerful bearish reversal candlestick patterns.
Traders can use it in conjunction with other indicators.
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.
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.
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.