What is the Gravestone Doji candlestick in trading?

Day traders and swing traders who are just starting their trading journey, often begin by studying various indicators. Indeed, some candlestick patterns can give accurate signals that can increase trading profitability. One such pattern is the Gravestone Doji candlestick, commonly observed on Forex, stock, and share charts.

What is a Gravestone Doji?

The Gravestone Doji is a bearish candlestick pattern with a very short or nearly invisible body and a long upper shadow. Its open, low, and close prices are typically at the same level.

The pattern usually appears at the top of an uptrend and before reversing. The longer the upper shadow, the more bears should be expected. Below is the anatomy of the Gravestone Doji.

The Gravestone Doji usually shows where a resistance level is forming, which can be used as a reference in the future if the price comes back and tests that level.

Characteristics of a Gravestone Doji

• Shape. An inverted T with a long upper shadow and no lower shadow.
• Price levels. Opening, closing, and low prices align closely.
• Appearance. Commonly forms at the top of an uptrend but may occasionally appear at the bottom of a downtrend as a trend continuation signal.

Other types of Doji candlestick patterns

While this article focuses on the Gravestone Doji, there are three other notable types of Doji patterns:

• Long-Legged Doji or Riksha is a candle with long upper and lower shadows, indicating intense buyer-seller conflict. Often appears at the top of a trend.
• Dragonfly is the inverse of the Gravestone Doji, with no upper shadow. This candlestick pattern most often refers to reversal patterns that end a bearish trend and begin a bullish trend.
• Four-price Doji is a candlestick with virtually no body and almost no upper or lower wick. It is easy to spot because it looks almost like a gap on the chart. The pattern is formed when volatility is close to zero in the market.

How the Gravestone Doji candlestick forms

The Gravestone Doji forms when the price closes near the level where it opened. It occurs when the bulls have enough strength to push prices up, but suddenly, they are knocked out by strong resistance and return to previous levels.

• At the top of an uptrend: Indicates a bearish reversal.
• At the bottom of a downtrend: Rare and signifies potential bearish continuation.

Red Gravestone Doji

One of the varieties of the pattern is the bearish Gravestone Doji—the one that is most often seen on Forex charts. It is used to predict potential trend reversals or to confirm other patterns.

One feature of the bearish Gravestone Doji is the long upper shadow, which is more than twice as long as the body of the candle. This pattern forms when the opening and closing prices of the candle are very close or identical. It signals increasing selling pressure, indicating that sellers are successfully pushing prices lower.

Green Gravestone Doji

Another type of this pattern is the bullish Gravestone Doji. It forms when candlestick opening and closing prices are exactly the same. The pattern suggests that sellers could overpower buyers and lower prices.

The traders view the Green Gravestone Doji as a bearish signal, indicating a change in market sentiment and portending an imminent reversal.

Gravestone Doji's pros and cons

Advantages

• Trend reversal signal. Indicates a potential trend reversal from a bullish market to a bearish market.
• Low-risk trading. Allows trading with low risk, provided that the trader places a stop loss above the high or the low of the candle.
• Simplified risk management. Simplifies risk management. The trader can exit the trade before they have incurred significant losses.

Disadvantages

• Requires confirmation. To confirm the pattern, the trader needs to use additional technical analysis indicators.
• Rare occurrence. The real Gravestone Doji is rare, as the opening, highest/lowest, and closing prices rarely coincide.

When a Gravestone Doji candlestick occurs

The pattern appears when the bullish momentum weakens. The buying that drove prices higher during the session is outweighed by selling pressure. This so-called battle between optimism and pessimism forms the distinctive shape of the Gravestone Doji.

Its appearance often precedes a trend reversal or a pullback after a prolonged uptrend. Traders view the Gravestone Doji candlestick as a bearish signal, foreshadowing the 'death' of the previous trend.

How to read a Gravestone Doji pattern

As a rule, Doji candles indicate indecision in the market at the end of a particular trend, and a Gravestone Doji is no exception. A long wick above a trading session's opening and closing prices indicates a bearish trading sentiment. Let's look at a few examples.

Examples

When a Gravestone Doji appears in the middle of the bearish run, most traders take the pattern as an indicator that a bearish trend will continue. This is because the buyers tried to push the price up, but were overpowered by the selling pressure.

However, the Gravestone Doji does not guarantee a 100% bullish trend reversal. Note the chart below, which shows bearish periods immediately following the occurrence of the Gravestone Doji, followed by a bearish period.

In this case, the pattern also appeared after a clear bullish trend, but the candlestick itself did not provide a clear indication of market reversal. For this reason, the Gravestone Doji (or any Doji candlestick) should never be considered a reliable trading signal in isolation. This is especially true during trading periods with low trading volume when a single candle has little to say about the overall market sentiment.

Instead, if you see a Gravestone Doji, wait for the next candle to appear to confirm your trade or use additional technical analysis tools such as triangle patterns, stochastic oscillator, or Fibonacci retracement levels.

If traders confirm the appearance of a bearish pattern, they can use these signals to close long positions and open short ones.

How to trade Gravestone Doji in Forex

Trading with the Gravestone Doji depends on your experience and trading strategy, but following these tips can help you use the pattern effectively:

1. Identify the pattern. Look for a Gravestone Doji where the opening and closing prices are near the candle’s low. Ensure the candle has a long upper shadow, indicating strong selling pressure.
2. Confirm the pattern. Use additional technical analysis tools to confirm the pattern, such as moving averages, stochastic oscillators, or trendlines. Only act on the Gravestone Doji once the reversal signal is verified.
3. Plan the trade. Open a short position, placing a stop-loss slightly above the high of the Gravestone Doji. Anticipate a potential trend reversal and a decline in the asset’s price.
4. Manage risks. Use stop-loss and take-profit orders to limit potential losses and secure gains.
5. Monitor the trade. Stay alert for unexpected trend changes. Adjust your strategy if market conditions shift to avoid unnecessary losses.

Final thoughts

• Gravestone Doji is a candlestick pattern that usually indicates the onset of a bearish trend. It has a short body and a long upper shadow, and nearly identical open, low, and close prices.
• Gravestone Doji does not guarantee a bearish trend. Bullish movements can still occur immediately after the pattern appears.
• Gravestone Doji is a rather ambiguous indicator, and market mechanisms can easily cause the next trading session to go differently than the Doji candle indicates.
• Traders enter a position when the next candle closes above (or below) the Gravestone Doji.