gravestone doji

What is the Gravestone Doji Candlestick Pattern? How and When Does It Form? And What Are Its Implications? 

It is a candlestick pattern that appears on the chart as an inverted “T” shape when the opening and closing prices are close together. The pattern forms at the peak of an uptrend and indicates a potential shift in market direction from bullish to bearish. 

It consists of a long upper wick or tail and a small or almost non-existent lower wick or tail. 

The long upper wick or tail indicates that Bulls (buyers) initially dominated and pushed the price higher, but Bears (sellers) regained control at the end, driving the price back down to the opening level before the close. The pattern is further confirmed after a bearish red candlestick forms on the following day. 

Although the Gravestone Doji is generally considered a bearish signal, it sometimes appears within a downtrend after a short-term rebound or correction. In this case, the pattern suggests the continuation of the downward movement. That is, the minor rebound has ended, and the price will resume its decline. 

In a rare case, the pattern may appear at the end of a prolonged downtrend. This indicates that the downtrend has exhausted its momentum and a bounce upward or a potential bullish reversal is imminent. 

If the pattern appears within a narrow price range (sideways), it generally provides no clear signal, and the sideways market movement is likely to continue. 

Applications of the Gravestone Doji Pattern in Trading Strategies 

In the Case of a Bearish Reversal 

As shown in the chart above for the XAUUSD (Gold/USD) pair, the Gravestone Doji formed near the peak of an uptrend. Since the pattern is a bearish signal, you can take advantage of the potential downtrend and open a sell position. 

To determine the entry point, wait until the next day’s candle closes below the low of the Gravestone candle. 

Place the stop-loss order above the high of the Gravestone candle (the top of the upper wick). 

The take-profit is determined based on risk appetite or the risk management strategy used. 

In the Case of Bearish Continuation 

If the Gravestone Doji forms within a downtrend, as in the chart above, a short sell position can be opened after the price breaks the low of the Gravestone Doji candle. 

The entry point is at the close of the next day’s candle. 

The stop-loss order is placed above the high of the Gravestone candle. 

The take-profit is determined according to the strategy used or the Risk/Reward Ratio.  

Confirmation of the Gravestone Doji Candlestick Pattern 

Like other trading patterns, the Gravestone Doji candlestick pattern cannot be relied upon to guarantee signal accuracy. It must be combined with other technical analysis tools, such as the MACD or RSI. A divergence between the price and the Relative Strength Index (RSI), or a crossover of the MACD and signal lines, can help confirm a potential reversal. 

Example of a MACD Crossover with the Signal Line: 

The USD/JPY chart shows a downward MACD crossover with the signal line, coinciding with the formation of the Doji candlestick. This is an additional confirmation signal for the downward movement.  

Indications of the Gravestone Doji Candlestick in Technical Analysis 

When market sentiment shifts from bullish to bearish and the Gravestone Doji candle begins to form, look for: 

• A long upper wick or tail with no lower wick: This strongly suggests that the Bulls (buyers) failed to maintain their high and lost momentum, and that the Bears (sellers) are gaining control.  

• Open and close prices are near the low of the period: This indicates that the Bears (sellers) successfully pushed the price down from the peak it reached. 

• The pattern’s appearance at the end of an uptrend: This means the market has reached an overbought area and a correction is imminent, signaling the start of a bearish reversal.  

• Confirmation of the pattern signal through a bearish red candle on the following day, or a series of bearish candles, which provides a stronger confirmation.  

But How Accurate and Reliable is the Gravestone Doji Candlestick? 

The pattern’s accuracy is affected by market conditions. Its reliability is lower in volatile or range-bound (sideways) markets, where it can give false signals. 

Conversely, the candlestick is more reliable on longer timeframes (such as daily or weekly charts) compared to shorter timeframes (such as 5 minutes).  

Remember: No single pattern or technical analysis tool is completely reliable, it must always be combined with other tools before making a trading decision. 

Trading the Gravestone Doji Candlestick in Stocks 

After the Gravestone Doji candle appears on the chart of the stock to be traded, confirm it using other indicators: 

For example: Look for additional bearish signals, such as a bearish divergence in the Relative Strength Index (RSI), or a price break below a key support level. 

After confirmation, you can open a short position, anticipating a potential trend reversal and price decline. You can place your stop-loss order above the high of the candle (the top of the upper wick). Alternatively, you can use a trailing stop-loss order or a take-profit order to secure profits and minimize potential losses. 

Be sure to monitor your position regularly and be prepared for any necessary adjustments based on new price movements and changing market conditions.  

Advantages and Limitations of Trading the Gravestone Doji Candlestick 

Advantages 

• It indicates a shift in market sentiment from buy to sell, and a potential bearish reversal of the price trend. 

• It helps traders identify key support and resistance levels and pinpoint clear entry and exit points. 

• It provides precise stop-loss orders placed above the candle’s high, which reduces trading risk. 

• It also allows traders to exit positions before incurring significant losses by identifying potential reversals.  

• It is an easily identifiable chart tool and an essential instrument for technical analysts who rely on charts for market analysis.  

Limitations 

• The pattern may give false signals, especially when it appears in a range-bound market or during a consolidation period, leading to misinterpretation.  

• The candle may not be reliable if it appears in isolation (not after a significant uptrend) or without strong confirmation from other technical indicators.   

• The pattern’s effectiveness depends on the timeframe used. It is less significant on daily charts than on weekly or monthly charts. 

• The candle is affected by market conditions, it may be less reliable during times of high volatility or low trading volume compared to stable market conditions.  

In nutshell 

Regardless of the analytical tool you use, proper risk management and the use of stop-loss orders are crucial to limiting losses and protecting capital.  

The effectiveness of any analytical tool or indicator also depends on the skill of the user. Otherwise, any signal produced by these tools will not be entirely accurate without the proper knowledge.  

You can take advantage of the dedicated education and analysis section at Naqdi to improve your trading skills and learn about different trading patterns. It is also recommended to start with a free Naqdi demo account before risking any real capital.