Gravestone doji

Gravestone doji is a reversal pattern that can appear at the end of an uptrend. It usually shows that buyers lose power because they can no longer move the price up and sellers take control of the situation.

Typical market decisions related to gravestone doji are:

• exiting the long positions (limit the losses)
• initiating short positions (playing on losses)

Doji

When the body of the candle is so small that the opening and closing prices are the same, a doji (candlestick line) is formed.

Doji occurs when the opening and closing prices are the same, however, there may be different interpretations that should be considered. The requirement that the opening and closing prices be exactly equal would impose too tight a limit on the data, and the doji would appear very rarely. If the difference between the open and close prices does not exceed a few ticks (the minimum price change), this is more than enough.

Doji depend on previous behavior of prices. If there is a single doji, it is a signal that the market is in indecision, and this can not be ignored. Doji means indecision and uncertainty. According to Nison, the doji more accurately indicate a trend change when appearing at the tops, but not in the hollows. This is due to the fact that in order to continue the upward trend in the market, new buyers should appear.

Characteristics of gravestone doji

Gravestone doji is formed on or near the daily minimum. This name, like many other Japanese terms, is associated with various analogies. In this case, it is a gravestone on the grave of those who fell in battle and will become ghosts.

The longer the upper shadow, the more bearish is gravestone doji. After the opening, the prices go up only to close the session where it opened, and this point turns out to be the same daily minimum. This cannot be interpreted otherwise than as an inability to grow.

Gravestone doji at the top of the market is a special variant of a shooting star. The only difference is that a shooting star has a small body, and gravestone doji has no body. The Doji headstone is interpreted by market analysts and traders as a reversal signal (most often), or a sign of extreme indecision in the market (less often).

This signal is formed by a candle with a long upper shadow and no lower shadow, which indicates that the price tried to move higher, but failed to do so and closed at a price equal to or very close to the opening price. Also, the candles must be almost non-existent body.

Other doji

Long-legged doji has long upper and lower shadows dividing the daily trading range in half, which clearly reflects the indecision of sellers and buyers. During the day, the market moved up and then fell sharply, or vice versa. Then it closed at the opening price or very close to it. If the opening and closing prices are in the middle of the daily range, the candle is referred to as a long-legged doji.

The opposite of gravestone doji model is the doji called Dragonfly. Dragonfly doji occurs when the market opens and closes at the daily maximum. If it has a longer lower shadow it signals more bullish trend . Like others, this doji usually appears in moments of market reversal.

Four price doji.This rare doji appears when all four price components are the same: open price, close price, high and low are equal. This candle appears when the stock is highly illiquid or the data source has no other prices than the closing price. Futures traders should not confuse this with restricted movement. This doji occurs so rarely that its appearance ought to see whether there are any data errors. However, this candle indicates the complete uncertainty of traders in which direction the market is moving.

Examples of Gravestone doji

• The classic example of a Gravestone doji pattern is when the price opens near the day’s high, trades lower, and then closes near the day’s low. This indicates that buyers were unable to push the price higher and sellers took control of the situation.
• Another example of a Gravestone doji is when the price opens near the day’s low, trades higher, but then closes near the day’s low. This shows that buyers had some power to push prices higher for a short period, but then sellers took control and the price closed near where it started.
• A more complex example of a Gravestone doji is when the price opens in the middle of the trading range, trades higher, and then closes near the day’s low. This shows that buyers were able to push the price higher for a short period, but then sellers took control of the situation and drove the price back down to near the opening price.

Advantages of Gravestone doji

Gravestone doji is a powerful reversal pattern that can be used to identify potential trend reversals. It offers several advantages to traders, such as:

• The potential to catch the start of a downtrend early, as the pattern often appears at the end of an uptrend.
• It can identify a potential area for setting stop-loss orders, as the pattern often appears at the top of a trend.
• It can be used to confirm a trend reversal, as a gravestone doji is accompanied by a break of a trend line and a close near the low of the day.
• The pattern is easy to spot and can be traded with a simple strategy.

Limitations of Gravestone doji

Gravestone doji is a popular candlestick pattern and a reliable indicator of potential market reversal. However, it is not foolproof and has certain limitations that must be taken into account when trading:

• The gravestone doji appears at the end of an uptrend and indicates a potential market reversal. However, it is important to remember that it is not always a reliable indicator and that many other factors should be taken into account when trading.
• The pattern is most effective when it appears in conjunction with other indicators, such as volume and support/resistance levels.
• The gravestone doji is sometimes difficult to spot due to its subtle nature, and can be easily missed by inexperienced traders.
• Since the pattern has a strong bearish sentiment, it is important to be aware of market sentiment and to be careful when trading. If the sentiment is too bearish, then the pattern may not hold true.

Other approaches related to Gravestone doji

Gravestone doji is a reversal pattern that can appear at the end of an uptrend. To supplement this pattern and make it more reliable, other approaches can be used, such as:

• Analyzing the volume of the candle: The volume of the Gravestone doji should be lower than the volume of the previous candles.
• A look at the previous candles: Before the Gravestone doji appears, the candles should have long upper shadows, showing that buyers have lost power.
• The confirmation candle: The Gravestone doji should be followed by a red candle, confirming the reversal of the trend.

In conclusion, Gravestone doji should be used in combination with other approaches to make it more reliable. Analyzing the volume, looking at the previous candles, and confirming the reversal with the next candle are all good ways to make sure the Gravestone doji is a reliable signal.

Footnotes

Gravestone doji — recommended articles

Dragonfly Doji — Inverted hammer — Symmetrical triangle — Price pattern — Bullish divergence — Bearish divergence — Tape Reading — Bear flag — Uptrend

References

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• Morris G. L. (2012).,Candlestick charting explained, Published by The McGraw-Hill
• Nison S. (1991)., Beyond Candlsticks. New Japanese Charting Techniques Reveale, Published by John Wilery & Sons
• Reversal Patterns (2019), Reversal Patterns
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Author: Anastasiia Ilnytska

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