The phrase ‘trend is your friend’ is more famous to the majority of the traders though they ignore it most of the time. On the contrary, the trend reversals are usually heavily anticipated and traders are looking for the start of the movement in the opposite direction. Also, many traders overview various markets, looking for turnaround point because such scenarios offer high risk-reward ratios which is a key aspect of risk management.
The gravestone doji is a candlestick pattern that is among those that are showing a reversal sign in the trend movement. The gravestone doji in bare outlines looks like the ‘T’ letter but turned around. Usually, the open, close and low prices are at the bottom of the candle, while the high of the candle is far away from them forming a big upper wick.
The word ‘usually’ is used because in book terms the low, the close and the open prices should be equal but it is a very rare case, therefore, an allowance is applied. I.e., there might be a small wick because the low is not equal to the close or the open could be different in comparison to the close price.
Taking into consideration the mentioned above formation, the gravestone doji candle that showed up on the chart at the top of an uptrend movement is likely a reversal sign in the price action.
Gravestone Doji Structure
The gravestone doji is not the only one pattern in the doji type class of candles. In overall, the dojis are neutral patterns because of the open and close prices that should be equal or almost equal to each other. In other words, the doji candles mean some sort of indecision. Though, the current gravestone doji pattern is mostly considered as a bearish pattern because its shape represents weakness on the side of the buyers.
The scheme below shows the gravestone doji candle pattern. Open, low, and close are almost equal in terms of price, being located at the bottom of the candlestick. The wick is higher, showing that the buyers pushed the price higher during some period of time, but failed to keep it at these levels and therefore price dropped.
Figure 1. Gravestone Doji
As any other candlestick pattern, the gravestone doji can occur anywhere on the trading chart. Though the highest potential usually takes place when this formation occurs at the highest point of the bullish movement, representing the fact that the buyers tried to push the price higher but were unable to hold the achieved levels, therefore price dropped and formed a wick.
The majority of people that tend to trade gravestone doji pattern usually seek for the above-mentioned kind of price action. Therefore, it is recommended to ignore the presence of the gravestone doji candle in the ranging markets (when the price is moving sideways) because the market still stays in some indecision locally, not giving any valid signs of further price movements.
Pros and Cons of Gravestone Doji
Gravestone doji’s appearance at the top of an upward movement signs a potential reversal. The upper shadow of the candle represents the local capitulation of the buyers, hence traders start losing confidence in the continuation of the bullish trend.
Therefore, it is a strong signal that is sent to market participants that the price is likely to turn around at this point. The more risky approach is to enter right after the close of this doji candle while more confident entry will be after the confirmation of the reversal by the next candle. Usually, the big bearish candle is a good sign that the price will change its direction.
This pattern could be also enhanced when it is combined with some other reversal confirmations. Other price action patterns like the bearish engulfing, shooting star or the head and shoulders formation are fairly suitable for this case. It is even better, when a confluence of some indicators, such as Supply and Demand, Supertrend indicator or some other occurs, improving a chance for a trend turnaround.
The negative aspect is that the gravestone doji is a fairly rare candlestick pattern. According to our Price Action indicator, that draws candlestick formations automatically, it’s a very hard task to find a candle where the close, low and open prices are the same. Therefore, some indulgence is usually applied and these prices may vary slightly.
Secondly, like all other patterns, the gravestone doji does not generate 100% accurate signals. The reversal may be very small or last for a very short period of time. It may even not happen at all despite the clearly formed candlestick showing a potentially nice reversal sign. If one of the mentioned cases occurs, such a candle is considered a fake reversal and afterwards, the buyers will take over the leadership to move price higher.
Therefore, it is always a good idea not to take gravestone doji as a stand-alone signal. With some cross-checks mentioned above or some specific trading approaches mentioned in the trading strategies, the power of the generated signals could be significantly improved.
Similarity to other candlestick patterns
This is a famous fact that various candle patterns may have some similar ones that are named differently. Rising three and Engulfing, Bullish separating Lines and Bullish kicker, etc. The same case is applicable to the gravestone doji which has a similar shape as the inverted hammer.
The main difference between these two candles is that the gravestone doji’s open, close and low prices should be equal while the inverted hammer should have a so-called real body. By the way, the doji patterns by their nature are endow by wicks (at least one wick in case of gravestone doji) and the absence of the body.
Another difference is that the gravestone doji is considered as a bearish reversal pattern. It usually takes place at the very top of an uptrend showing the potential change of an uptrend. On the contrary, the inverted hammer in the majority of cases if formed at or at least near the bottom of a downtrend and, therefore, signals that the current trend is likely to change. The basic price action behind the inverted hammer is that the buyers have shown their local power and it is a sign at least to be aware of the turnaround.
Figure 2. Gravestone doji and inverted hammer comparison
The inverted hammer is not the only similar pattern. There is even more congeniality with a so-called shooting star candle pattern. Among the similarities, there is a fact that both of them tend to happen at the top of an upward movement. Thus, this signal is sent to the traders about soon potential reversal, therefore they should be careful with their long positions if they are holding any or even prepare for short opportunities.
Another one thing in common is that the upper wick of the candle is heavily larger than the body of the candle. The open, close and low prices are located at the bottom of the candle. The only difference between them is that a shooting star pattern has a body that may be either bullish (when the open price is higher than the close), or bearish (when the close price is lower than open price). While, as mentioned earlier, traditionally the gravestone doji pattern has no body at all.
How to find and trade the gravestone doji?
In the text above we have covered the definition of the pattern, its advantages and disadvantages, so if you have decided to use it in your trading then it should be noted how to spot it at first.
Looking for the gravestone doji pattern
There was previously mentioned the fact that the main feature of this pattern is its long wick. The longer upside wick means more powerful pattern. When it comes to looking for this pattern on the chart you should definitely start with a wick.
It may be very time consuming staring at the chart (or multiple charts in case of trading several instruments) and analyzing if the pattern has been formed or not. Therefore, the Price Action Indicator has been created by TradingKit that is automatically looking for various candlestick patterns including gravestone doji.
It can not only show it on the chart but also send desktop or mobile PUSH alerts so you will never miss the desired pattern to have an ability to get some profit. It will save a lot of time that could be spent studying other price action patterns or other trading strategies to improve the trading approach.
Figure 3. Gravestone doji price action pattern
Trading gravestone doji pattern
On the chart above you can see a nicely spotted doji candle that was spotted by the Price Action indicator. The candle has the allowance – the lower small wick that was formed because the low was not equal to the open and the close prices.
When it was spotted, the more aggressive traders might have entered right after the close of this gravestone doji candle. This type of entry is treated as a non-confirmed so might slightly lessen the chances of being profitable.
The more conventional traders wait for the next candle to close and there is an ideal setup because afterwards the engulfing candle was formed. This is a very good confirmation that the previous doji candle was not occasional. Therefore, we might give it a chance to go and enter the trade and place the stop beyond the high of the gravestone doji candle.
Next price action of two candles again forms long upper tails that are informing us that the buyers are struggling to move price higher, hence the candles close near their lows. It is again a confirmation that the chosen direction downwards was correct.
The next five candles represent a clear local downtrend. All the candles of this move were bearish showing the power of the momentum and the strength of the sellers. The weakness of the buyers was again shown as the long upper wicks.
The first candle after that series of red candles was a clear sign to get out of the trade. It was a strong bullish engulfing formed at the very low of the downside movement indicating that the trend might be over (at least, for some time).
Eventually, this trading setup allowed to get at least a 1:2 risk to reward ratio which is certainly fulfilling the risk management rules. The setup was formed on M15 chart though more precise entries on lower timeframes could increase the Risk:Reward ratio by improving the open prices and decreasing the stops.
The gravestone doji is a reversal formation and is considered a bearish signal. Its structure could be described as the long wick and the open, close and low prices that are (or almost) equal. As for the other candles from the doji group, the gravestone one does not have a body.
The basic price action behind this candle is that the buyers were trying to move price higher but struggled to do it, hence the price returned to the open of the candle showing that the last dominance was demonstrated by the sellers.
When spotted, the first possible entry point will be to open a position right after the candle was formed. The second one is to wait till the close of the next candle after the gravestone doji to get some confirmation (or even a formation of another pattern like on the chart above).
The key point is to keep the risk management under control and always to place stops as well as to monitor the reversal patterns when the trade is opened to get out in a timely manner.