2024.10.18 2024.10.18
Gravestone Doji: How to Trade This Candlestick Pattern

Alan Tsagaraevhttps://www.litefinance.org/blog/authors/alan-tsagaraev/

In the modern world of trading and investing, it has become common to rely on technical indicators and trading robots, bypassing conventional chart and candlestick patterns.

Many novice traders underestimate the signals given by Japanese candlesticks or large patterns on price charts. Notably, these signals are crucial for understanding market psychology and its current condition. Thus, it is nearly impossible to trade profitably without these tools.

This article reviews a very rare yet significant technical analysis pattern known as a “Gravestone doji” candlestick. The overview explains how effective a “Gravestone doji” pattern is in trading and provides guidance on how to properly integrate the pattern into your trading strategy.

Key Takeaways

What Is a Gravestone Doji Candlestick?

A “Gravestone doji” is a chart pattern that usually forms at the peak of an uptrend and consists of a single candlestick with a missing body and a long upper shadow.

The pattern takes the form of an inverted “T” due to the peculiarities of trading within a specific period. For example, on the daily time frame, the opening price is equal to the lowest price for the whole trading period. Next, throughout the day, the quotes grow to the highest level, and by the end of the trading session, they fall back to the opening and the lowest price level. A long wick reflects the impulse bearish pressure on the price.

A “Gravestone doji” pattern usually signals a fading bullish momentum and appears before a price reversal at the peak of an uptrend. However, this Japanese candlestick can also be observed at the bottom of a downtrend, signaling market uncertainty and indecision and a potential bullish reversal.

A “Gravestone doji” candlestick not only signals trend reversals but also suggests downward corrections following a prolonged bullish trend. Thus, it is better to look for the pattern at the trend’s highs.

An example of this pattern is illustrated below in the 30-minute stock chart of Walgreens Boots Alliance Inc.

The asset price was in the accumulation phase, but after the formation of a series of “Gravestone doji” patterns, it began to drop sharply. The patterns became a strong signal to close long trades and initiate short positions on the instrument.

What Does a Gravestone Doji Look Like?

A “Gravestone doji” bearish reversal pattern looks like an inverted letter “T” and resembles a tombstone from which it derives its name.

The opening and closing candlestick prices should be at the same level as its low. Sometimes, the pattern can form a small lower shadow, which is also considered a variation of a “Gravestone doji” pattern. Additionally, the upper shadow of the candlestick with the highest price should be long.

The pattern demonstrates how sales put pressure on bulls during the day, resulting in a significant decrease in quotes by the end of a trading session.

How Does a Gravestone Doji Form?

A “Gravestone doji” appears after a prolonged bullish trend. Initially, the market opens with price growth, but as a trading session progresses, the sales volume seriously increases, leading to a long upper shadow and a missing body formation. Essentially, a “Gravestone” candlestick is a reflection of the struggle between bulls and bears, with the latter emerging victorious.

The candlestick’s extended upper shadow indicates the bulls’ unstable position in the market. The pattern causes the closing of long positions and forces traders to open short ones, resulting in a market reversal and a subsequent price decline.

A vivid example of a sharp and impulsive price collapse after a “Gravestone doji” formation can be seen below on the 4-hour gold chart.

After a long upward trend, the asset hit strong resistance and retreated, forming “Bearish marubozu” candlestick patterns. Prior to the quotes’ sharp collapse, “Gravestone doji” and “Bearish engulfing” reversal patterns can be identified on the candlestick chart. The support breakout became a confirmation of the bearish trend’s beginning.

How to Identify the Gravestone Doji Candle Pattern

“Gravestone doji” candlestick patterns are easy to spot on a chart because of their unusual appearance. It is typically found at market peaks when an asset is undergoing a reversal following a prolonged uptrend. The presence of a long shadow and the absence of a candlestick body, with opening and closing prices at the same level as the low, indicate significant bearish pressure on the price.

Besides, make sure that the pattern forms at one of the key resistance levels. This confirms that bears become stronger.

Various stochastic and trend indicators, as well as volume and cash flow indicators, can be used to confirm a “Gravestone doji” candlestick. Moreover, additional candlestick and chart patterns, along with breakouts of support levels and trend lines, can be utilized to validate the pattern.

The hourly chart of the EURUSD currency pair shows how the price failed to break through the resistance level before a “Gravestone doji” pattern emerged. The pattern formation led to the downward trend reversal, and the subsequent appearance of a “Hanging man” reversal pattern finally confirmed the loss of the bullish momentum.

How to Trade the Gravestone Doji Candlestick Pattern

A “Gravestone doji” pattern forms at uptrends’ peaks, but as mentioned above, it can also be spotted at the bottom. Therefore, there are two strategies for trading a “Gravestone doji” in a bullish and bearish trend.

Bullish Gravestone Doji Candlestick Pattern

A bullish “Gravestone doji” variation is a less reliable upward reversal signal, unlike its bearish analog emerging at the top of an uptrend.

A bullish “Gravestone doji” pattern appears at the bottom after a prolonged bearish trend, signaling a waning of bearish momentum and a potential upward price reversal.

However, it is crucial to get additional confirmation from technical indicators to avoid false signals.

Let’s analyze an example of trading a bullish “Gravestone doji” pattern using the 4-hour BTCUSD chart.

Values description:

1. “Gravestone doji” pattern.

2. “Dragonfly doji” confirmation pattern.

3. Consolidation zones.

4. Support levels.

5. Resistance levels, profit targets.

6. Gradual liquidity inflow in the asset.

7. MACD crosses the zero line and gives a buy signal.

8. RSI values grow, giving a bullish signal.

9. Rising tick volume.

10. Channel’s upper boundary breakout, buying.

11. Stop-loss.

The price has been trading in the consolidation zone 41809.76–43840.39 for a long time, within which a “Gravestone doji” pattern has formed. Nevertheless, the pattern has not received timely confirmation, and the quotes continued to move in a narrow, sideways range.

After some time, the price formed a bullish “Dragonfly doji” pattern and broke through the upper boundary of the channel on increased volumes, continuing to rise. This was a confirmation of a “Gravestone doji” pattern, although belated.

Additionally, technical indicators also indicated an uptrend development. The money flow index showed the inflow of liquidity into the asset. The RSI readings were also growing, suggesting a potential for further increase. MACD generated a buy signal when crossing the zero boundary from below.

In this case, one could open long trades above the resistance of 43840.39 and partially lock in profits within the 45411.26–52882.46 area.

A stop-loss order should be set below the “Dragonfly doji” pattern or the support of 41809.76, where the “Gravestone doji” pattern formed.

Bearish Gravestone Doji Candlestick Pattern

A bearish “Gravestone doji” candlestick typically occurs at the tops of price charts. In a fading bullish trend, this pattern indicates the end of upward movement and signals a downward price reversal.

Let’s analyze this bearish pattern in more detail using an hourly chart of AT&T Inc. stocks.

A “Gravestone doji” pattern with a long upper shadow can be identified near the 18.66 mark. After the pattern formed on the candlestick chart, the price sharply declined and crossed the MA50 dynamic support level, confirming the “Gravestone doji” pattern. During the formation of the candlestick pattern, the MACD values crossed the zero boundary from above, growing in the negative zone.

Besides, the Stochastic indicator values left the overbought zone and crossed the upper boundary from below. According to the OBV indicator, trading volume also began to decline, signaling a new bearish trend.

In this case, one could open a short position immediately after a “Gravestone doji” pattern formation, placing a stop-loss order above the resistance level of 18.78.

Profit targets should be located at the nearest support levels within 17.96–16.65.

Gravestone Doji vs. Dragonfly Doji

“Gravestone doji” and “Dragonfly doji” patterns both signal a trend reversal, yet there are differences between them.

Gravestone Doji

• A “Gravestone doji” is a candlestick pattern in the shape of an inverted letter “T,” formed on tops of uptrends and signaling a bearish reversal.

• The pattern has a long upper shadow with opening and closing prices at the level of the candlestick’s low.

• The candlestick shows that bulls managed to drive the price higher during the trading session, but bears pulled the quotes back to the opening price level.

Dragonfly Doji

• A “Dragonfly doji” is a bullish reversal pattern, formed mostly at the bottom after a long downtrend and indicating growing bullish momentum.

• The pattern forms in the shape of the letter “T” with a long lower shadow and closing and opening prices at the level of the candlestick’s high.

• At the beginning of trading, bears drag the price down, but as the session draws to a close, they lose control over the market, allowing bulls to regain their lost ground by the end of trading.

Notably, “Dragonfly doji” and “Gravestone doji” patterns can appear both at the bottom and at the top. Except that “Gravestone doji” gives a stronger sell signal at the top, while “Dragonfly doji” provides a stronger buy signal at the bottom.

The Gravestone Doji Pattern – Pros and Cons

A “Gravestone doji” pattern is a crucial strong signal, yet it has both advantages and disadvantages.

Conclusion

A “Gravestone doji” candlestick is one of the most reliable reversal patterns at the top, yet it has its nuances.

A bearish pattern’s variation usually occurs at the peak after a long uptrend. However, it can also appear at the bottom of a downtrend, signaling an upward reversal.

Most often, the pattern can be detected on the H4 and lower time frames. The higher the time frame, the rarer this pattern appears on the chart.

Like most other candlestick patterns, a “Gravestone doji” candlestick is best used in combination with technical indicators and other chart patterns. This approach will enhance the effectiveness of the pattern within a trading strategy and bolster potential profitability.

You can try trading a “Gravestone doji” pattern for free on the demo account offered by LiteFinance, one of the leading brokers. Take advantage of the multifunctional web platform and trade various financial assets.