The world of finance has been developing for a long time, even today, with the rapid advancement of technology. New approaches, techniques, and patterns emerged that made it easier to analyze the market, such as the Gravestone Doji pattern.
The way in which these patterns were obtained in general is exciting, and what many are interested in is which one we would single out to be among the most effective. Of course, our focus is on the Gravestone Doji pattern for several reasons, which we will present to you below.
Nonetheless, before we turn our full attention to the Gravestone Doji meaning, let’s first explain the term “Doji” so that everything is much clearer, shall we?
Explanation of Doji – Learn the essentials
A Doji, or in other, more accurate words “dо̄ji,” represents a specific name of a session in which one candlestick for security includes virtually equal “open” and “close” that are often components in patterns.
In Japanese, the word “Doji” means “mistake” or “blunder.” It refers to the absolute rarity of having the same open and close price. When it comes to Doji’s look, the Doji candlesticks remind of a cross, plus sign, or inverted cross. Standing alone, Doji is neutral, primarily patterns that are also featured in a significant number of crucial patterns.
In order for Doji candlestick to form, it’s happening once a security-s open and close are virtually equal for the specific period and signals a reversal pattern for technical analysts, in general. So, what is precisely Gravestone Doji? After this explanation of Doji, can you assume Gravestone Doji?
What is a Gravestone Doji?
A Gravestone Doji refers to a bearish reversal candlestick pattern that’s shaped once the open, low, and closing prices also are very near to each other with a long upper shadow. The candlestick refers to a type of price chart used in technical analysis. It displays the high, low, open, and closing prices of a security for a particular period.
The shadow in this pattern, or a wick, represents a line that’s found on a candle in a candlestick chart. It’s used to indicate where the stock price has managed to fluctuate relative to both opening and closing prices.
When it comes to the long upper shadow in the pattern, it’s crucial to understand that it suggests that the bullish advance at the beginning of the session is most common just before a longer-term bearish downtrend.
Bullish Gravestone Doji vs Bearish Gravestone Doji
Doji Candlesticks represent a category of technical indicator patterns that can either be bullish or bearish. However, it all depends on the position of the gravestone Doji candlestick. The Gravestone Doji is a bearish pattern that indicates a reversal of a price uptrend at the very start of a downtrend.
On the opposite side, the Dragonfly Doji represents a bullish pattern that indicates an uptrend that will occur. Therefore, a Gravestone pattern is used as a great sign to take profits on a bullish position or enter a bearish trade.
Gravestone Doji vs Dragonfly Doji – Learn the difference
As mentioned above, the opposite of Gravestone Doji is a bullish Dragonfly Doji that looks like a “T,” and it’s formed once they open, close, and high of the session are almost all the same. Even though these two formations are known as separate entities, they’re the same phenomenon.
Once confirmed, one is able to be called bullish while the other is bearish. However, sometimes they both can appear in the opposite scenario. For instance, a Gravestone Doji can be followed by an uptrend, or a bullish dragonfly could appear right before a downtrend.
What both patterns require are the volume and the next candle for confirmation. Perhaps it’s more beneficial to consider both patterns as visual representations of uncertainty rather than pure bullish or bearish signals.
Indications of the Gravestone Doji Pattern
It’s essential to understand what a Gravestone Doji pattern is telling you. First of all, keep in mind that it implies that a bearish reversal is very near to come. Even though low, open, and closing prices do not require equal stances for the pattern to be 100% valid, it’s crucial to be a relatively small tail. In the opposite way, the pattern could be classified as an:
- Inverted hammer
- Spinning top
- Shooting star
The market narrative refers to the bulls’ attempt to push to new highs over a particular session. Nonetheless, the bears push the price action to near the open by the session close. Therefore, the long upper shadow represents exactly the bulls losing momentum.
Gravestone Doji in a downtrend
We’ve explained that a gravestone Doji represents a bearish pattern that suggests a reversal followed by a downtrend in the price action. However, Gravestone Doji is more frequently found at the end of an uptrend, even though it can also be found at the end of a downtrend.
Keep in mind that, regardless of Gravestone Doji Pattern’s popularity, the pattern suffers from the same reliability issues as numerous visual patterns. In general, traders are not likely to act on Gravestone Doji unless the next candle confirms the reversal.
How to trade the Gravestone Doji?
Among the most frequently asked questions regarding this specific topic is, undoubtedly, how anyone can trade Gravestone Doji. We have prepared you a simplified Guide on how to spot the Gravestone Doji pattern first and trade it with great success, step by step. Here are all the crucial steps:
- Learn to spot the Gravestone candlestick as a reversal formation that, in most cases, comes at the top of the bullish trend.
- The psychological pattern behind that pattern indicates the bulls bring the equity to an unsustainable level. On that level, the bears take over.
- Traders can visually confirm that this pattern symbolizes the side profile of a gravestone for the bulls.
- You have to short the stock as a trader once a candle closes below the Gravestone Doji’s tiny body.
- Each Gravestone Doji trader should use a stop loss that should be placed above the highest point of the candlestick.
- In order to set profit targets when trading, you’ve got two options:
- a) Look for a price move that is equal to the size of the formation, which is highly recommended for longer Gravestone Doji candles.
- b) Go after targets equal to twice the doji’s size. It’s recommended to do so if the Doji candle is smaller.
After reaching your initial target, it is essential that you stay calm and patient if the stock keeps trending in your favor. However, there are two simple rules you should follow strictly in order to do it correctly:
- Adjust your stop right above the initial target.
- Until you spot two bullish candles in a single row, stay in the trade. This suggests that the bearish move might be over.
Risk Management when trading Gravestone Doji
If have an interest in trading Gravestone Doji, it is crucial to determine where to place your stop-loss order. Like any other trade formation or setup, you have to protect your capital at all costs.
The stop loss location is placed above the high of the Gravestone Doji candlestick. The one caveat is that for every Gravestone Doji, your level of risk will definitely vary. Variations depend on the length of the candlestick wick.
What are the limitations of this pattern?
The benefits of this pattern are indeed obvious; however, the question arises as to whether and what the limitations of the Gravestone Doji pattern are. The pattern can suggest a stop loss placement and eyeball a profit-taking plan on a famous downtrend.
However, these are significantly less precise methods than other technical indicators provide. Despite the fact that reliability increases with a specific confirming candle and volume, the Gravestone Doji is best to be accompanied by other technical tools to guide trading.
The statistics of the Gravestone Doji pattern
It’s evident that numerous people from all around the world have an interest in knowing what are the odds of the Gravestone Doji pattern working in their favor. Here is how the Gravestone Doji behave with a 2:1 target R/R ratio:
From our deep research and understanding, the pattern confirms 47.5% of the time on average all the 4120 markets we have managed to analyze.
If we observe it historically, the patterns became confirmed within 5.5 candles or invalidated within 5.6 candles. If they receive confirmation, it will reach the 2:1 R/R target and 39.9% of the time. It retested its entry price level 89.1% of the time.
Therefore, without accounting for fees, the expected outcome is 0.196$/$. It means that for every $100 you risk to trade with this pattern, you will make $19.6 on average!
A Gravestone Doji represents a bearish pattern that suggests a reversal, followed by a downtrend in the price action.
The opposite of this pattern is a Dragonfly Doji pattern.
The Gravestone Doji pattern could be used as a sign for entering a bearish trade or taking profits on a bullish position.