Guide to trading the gravestone doji candlestick pattern
Candlestick patterns are one of the ways, traders can trade based off the price charts. The candlestick patterns are nothing but repeating patterns which, based on where they occur in the price chart can signal key market information.
While the candlestick patterns are not magical, they merely represent the market sentiment for the period.
For example, if you were looking at a one hour chart, the candlestick patterns that you see represent the market sentiment for the one hour period.
Likewise, when you look at the candlestick chart for the daily session, these patterns represent the market sentiment for the day.
Depending on the bullish or bearish activity, the candlestick patterns can close bullish or bearish. Furthermore, depending on the intraday activity, you can also visibly see the highs and the lows that are formed.
There are many types of candlestick patterns. Some are single candlestick patterns. This means that the patterns formed are based off the single session.
Besides the single candlestick patterns, you can also find a two session candlestick patterns. Examples of such type of patterns include the bullish engulfing pattern or the bearish harami pattern.
Finally, you also have three candlestick patterns such as the three rising crows.
Regardless of whether you are looking at a single candlestick pattern or a three session candlestick, these patterns can reveal important market information.
In this article, we will focus on one particular candlestick pattern called the gravestone doji.
While this is a single candlestick pattern, you can use this pattern to combine with the evolving price action as well to gain valuable market insights.
One of the big advantages of the candlestick patterns is that they can be combined with any of your existing strategies.
For example, if you were using a strategy that makes use of moving averages and oscillators, you can also focus on the candlestick patterns that are forming to time your entries and exits.
In the next section, we take a look at the gravestone doji pattern in more detail.
What is the gravestone doji pattern?
The gravestone doji is a very easy to recognize candlestick pattern. At the same time, the gravestone doji pattern is also easy to understand and trade. Once you have a good understanding of this candlestick pattern, you can combine it in multiple ways to trade.
A gravestone doji pattern is visually identified by a long wick and the open and the close are almost the same.
Figure 1: Gravestone doji pattern
It should be noted that finding such as textbook perfect pattern is very rare in the markets. Therefore, you should allow a bit of flexibility to this pattern.
For example, you can allow yourself to be flexible to identify a gravestone doji pattern even if the open and the close differ by a few ticks or a few pips. However, as long as the difference between the open and the close is not too much, the candlestick can still pass off as a gravestone doji pattern.
The next chart below gives a few examples of the gravestone doji pattern from some real price charts.
In figure 2, you can see the gravestone doji pattern on the GBPUSD weekly chart. If you closely observe this to the textbook pattern that is shown in figure 1, you can see that the open and close are not the same.
However, the candlestick pattern in figure 2 can pass off as a gravestone doji as the open and close remain close to the lower bottom of the entire range of the session. While in the above example, the close was higher than the open, a similar, close lower than the open would also pass off as a gravestone doji pattern.
What is the gravestone doji pattern formed?
The gravestone doji pattern is the most useful when it forms at the top end of the rally. There is a lot of market information that goes behind the formation of the gravestone doji pattern.
When a gravestone doji forms in a downtrend, it can signal a continuation to the downtrend or sideways consolidation.
Firstly, the gravestone doji pattern is the most powerful when it forms near the top end of the rally. When this pattern is formed, price signals that it could turn weaker in the near term. At times, this reversal in the direction of price can also mean that a new trend is emerging.
A gravestone doji is marked by the long upper wick. This upper wick is formed due to high levels of activity. Since price is in an uptrend, it is the bulls who are overwhelming the market, pushing prices higher.
Once price nears the top, the bullish activity rises as well. However, at this point, the sellers come into the picture and overwhelm the buyers. This leads to a strong pullback from the intraday highs. Eventually, the battle between the buyers and the sellers leads to the sellers overwhelming the markets on the day.
As a result, the open is almost similar to the close. Even in the case of when the open is slightly higher than the close, it can still pass off as a gravestone doji. The logic behind this is that despite the strong buying activity over the day, the sellers limit the buyer activity leading to the close being slightly higher than the day’s open.
Characteristics of the gravestone doji
The gravestone doji candlestick pattern is very easy to distinguish. Primarily, the gravestone doji pattern belongs to the family of doji candlesticks. The doji candlestick patterns are visually different compared to other candlestick patterns.
The most distinguishable character is that the doji candlesticks have long upper and lower wicks with the body (meaning, the open and the close) being very small in comparison or almost the same.
The gravestone doji is the most powerful when it comes at the top end of a strong rally. Usually, you will find strong bursts of price action which pushes the price of a security into a strong uptrend. These trends tend to be sharp and see little to no pullback.
When such a trend emerges, a gravestone doji pattern can signal a temporary pause to this trend or even a potential reversal.
The occurrence of the gravestone doji pattern near key areas such as the top end of the rally, near resistance levels can give it even more importance.
The gravestone doji pattern can occur in just about any timeframe and as long as it meets one of the above criteria, the gravestone doji pattern carries the same importance.
Let’s take a look at an example of the formation of the gravestone doji pattern.
In figure 4, we have an example of the gravestone doji pattern. The chart is the daily chart for GE stock. The horizontal lines plotted are nothing but resistance area and the lower horizontal lines are the support levels.
You can see that price action was in a steady uptrend. After hitting a resistance area and failing to clear this level, the price started to gradually decline.
Close to the resistance area and within a few sessions, you can see the emergence of the gravestone doji pattern. At this point, the 20 and 50 period EMA are still signaling a bullish signal. However, long positions could view the emergence of the gravestone doji pattern and liquidate their positions here.
Following the emergence of the gravestone doji pattern, price makes a steady decline. Eventually, price falls to lows of the previous support and eventually breaks down below this support level as well.
You can see how the gravestone doji pattern provided meaningful information while other indicators at that point were still lagging.
The dragonfly doji – The opposite of gravestone doji
While this article focuses on the gravestone doji, it is also important to note the opposite formation which is called the dragonfly doji. The dragonfly doji is formed when the open and close are near the top end of the range.
The dragonfly doji has a long lower wick. This pattern is the exact opposite of the gravestone doji.
The next chart below shows the gravestone doji and the dragonfly doji pattern for comparison.
Figure 5: The dragonfly doji pattern
As you can see in figure 5, the dragonfly doji is the exact opposite to the gravestone doji. It also exhibits the opposite characteristics of the gravestone doji.
The dragonfly doji is formed towards the end of a downtrend and can found is various bottoming patterns. When the dragonfly doji pattern appears, traders end to push the price of the security lower but fail to do so.
This leads to the long lower wick being formed. At the same time, the buyers overwhelm the sellers and the result is that the open and the close are almost the same. The formation of the dragonfly doji pattern signals a potential reversal of the downtrend.
You can combine the dragonfly doji alongside other technical indicators and potentially anticipate when the price of a security has bottomed.
Trading tips for gravestone doji
When trading with the gravestone doji, firstly remember this pattern does not occur that frequently. However, you can anticipate this pattern when there is a strong uptrend. Furthermore, it is always advisable to scan the different timeframes.
A gravestone doji pattern has the same characteristics regardless of the timeframe where it is formed. As a result, traders need to constantly look for the gravestone doji pattern formation.
You can use one of the many candlestick pattern scanner websites that are free to use to scan for this pattern.
Once the pattern emerges, pay careful attention to where the gravestone doji pattern is formed. Sometimes, the pattern can occur in the middle of a trend. However, when there is no resistance level formed, there is a good chance that price will continue to push higher.
always look for validity of the gravestone doji pattern. It is the most powerful when formed at the end of a rally and close to or at a resistance level or area.
Stops can be placed a few pips off the highs from the gravestone doji pattern or near the latest pivot high point that is formed.
It is also important to bear in mind that just because there is a formation of a gravestone doji pattern, it does not mean that the next candlestick will be bearish. Therefore, look to confluence of multiple indicators and price action patterns before committing yourself to the trade.
Divergence patterns that usually form near the high or at the end of a correction are also a great way to validate the formation of a gravestone doji pattern. You could also look at some of the key Fibonacci price levels which can also validate the formation of the gravestone doji patterns.
The Gravestone doji pattern – In Summary
To summarize, the gravestone doji pattern is one of the many candlestick patterns that occur repeatedly. The appearance of the gravestone doji pattern near the top end of the rally can potentially signal a reversal to the trend, provided it forms near a visible resistance level.
The gravestone doji pattern basically belongs to the family of doji candlestick patterns. These patterns usually signify indecision in the markets. However, the gravestone doji and its opposite, the dragonfly doji are considered to be reversal patterns.
These two candlestick patterns can be combined with existing technical trading strategies and can greatly improve the performance of timing your trade entry and exits. The gravestone doji pattern can practically occur on any time frame and across any financial markets. They hold the same significance regardless of the time frame or the markets they are formed in.
Last but not the least, do not trade the gravestone doji pattern in isolation. This can lead to potential losses. This is due to the fact that the markets random and therefore, you can expect to see price action continuing its previous trend despite the appearance of the gravestone doji pattern.
As with anything in trading, always make sure to test these patterns first on a demo trading account before applying it to the real markets.
Table of Contents
- Guide to trading the gravestone doji candlestick pattern
- What is the gravestone doji pattern?
- What is the gravestone doji pattern formed?
- Characteristics of the gravestone doji
- The dragonfly doji – The opposite of gravestone doji
- Trading tips for gravestone doji
- The Gravestone doji pattern – In Summary