What Is a Gravestone Doji? Definition & Example & How to Trade Using Gravestone Doji
In stock trading, technical analysts use different candlestick patterns to curve out a possible price action. Some of the most popular being the doji, hammer, morning star, and others. In this article, we look at the Gravestone Doji. But first, let’s define what a doji is.
What is a Doji?
A doji is a session in the market where a candlestick has a close and open which appear to be equal. There are five types of doji candlesticks namely:
· Gravestone Doji
· Long Legged Doji
· Dragonfly Doji
· Standard Doji
· 4-Price Doji
Doji in Japanese means a mistake. It is for this reason technical analysts use doji to predict a reversal in price movement. While there are many techniques to predict future price movements, investors use the doji to silence market noise, coming up with a precise price probability.
What is a Gravestone Doji?
A gravestone doji appears in a bearish market. It forms when the open, close and low prices are near each other. As such there’s a long upper shadow suggesting the bearish market overtook the bullish market. The pattern enables traders to enter a bearish market or take profits in a bullish market.
It therefore implies entry of a bearish reversal pushing the prices of the asset further down. The narrative behind Gravestone Doji is that bulls are trying to push the price of the asset to new highs but lose momentum to the bears who drive the price further down.
While it forms at the close of a downtrend, it is more efficient at the end of an upward trend. The doji is popular with many traders; however, most act on it until the next candlestick confirms a price movement reversal. Gravestone doji is the opposite of the dragonfly doji.
What is a dragonfly doji?
Like the gravestone doji, the dragonfly signals a reversal in price movement. It can be a downtrend or uptrend depending on the previous price movement. It forms when the high, close, and low prices are near each other. This forms a long lower shadow indicating sellers were dominating the market during the session. However, the buyers flooded the market pushing the prices back up.
The dragonfly doji indicates that a price reversal is imminent. Especially an uptrend. Like the gravestone doji, traders wait for the next candlestick to confirm the price reversal. While it is not common, its appearance warns investors of changes in the market.
It shows sellers were active during the first phase of the session. Towards the end, buying pressure overcame selling pressure pushing the price back to open. As such, most traders forecast a continual uptrend in the market.
Difference between gravestone doji and dragonfly doji
The gravestone doji forms when the open, close, and low prices are similar. It forms an inverted “T” shape. On the other hand, dragonfly doji forms when the open, close, and high prices are similar forming a “T” shape. Both indicate price reversal in the future; either an uptrend or downtrend.
How to Interpret the Gravestone Doji
As mentioned, the gravestone doji can form in a downtrend or uptrend. Here are examples in each price movement.
During an uptrend
A gravestone doji often forms at the top of an uptrend. This serves as a warning to the bulls to anticipate a downtrend. While it is more efficient in 4-hour or daily candles, it works the same across all periods. It indicates the bulls are losing power to the bears. As such, the price of the asset is set to fall, leaving behind a long lower shadow.
In most cases, it announces the near end or imminent end of an uptrend. If you are in a bull position, it is the right time to exit your position and reap your profits before price reversal. And if you want to enter the market, you can do so at a bearish position. While it is likely for the bulls to maintain an uptrend, the pressure from the sellers outweigh their power.
During a downtrend
A gravestone doji can also form during a downtrend. And like in the uptrend momentum, it should come as a warning. In a downtrend, it confirms continuation of the downtrend. However, it can also suggest market ranging, forcing prices to stagnate within a certain range before a downtrend.
Formation of a gravestone doji at the bottom is not confirmation of price reversal. Rather, it shows the prices will continue to fall in the future.
Double gravestone doji
Formation of two gravestone dojis confirms the bears are gaining more power overshadowing the bulls. Once either of the two gravestone doji breaks, there’ll be a quick downtrend price movement. While it is common for novice traders to take action once they confirm a double gravestone doji, you should take it with a grain of salt.
You should wait for the next candlestick to confirm the price movement. Besides, you should use other techniques such as moving averages, MACD, RSI, and Fibonacci levels to confirm the impending price movement. While not common, the bulls might hijack the market pushing prices back up again.
Triple gravestone doji
Like the double gravestone doji, it can confirm a downtrend in the market. However, you should also confirm this using other trading techniques. The next candlestick should confirm whether the price will fall or rise.
How to trade the gravestone doji
With the basics of gravestone doji at hand, let’s see how you can use it for your advantage. As mentioned, you should not barely depend on the doji for trading decisions. Rather, you should use a handful of indicators. That said, most traders would exit long positions once the gravestone doji forms. Likewise, other traders would enter short positions in the same session. You should also consider the volume traded during the session and keep in mind the price action before its formation.
Risk management strategies
Since entering a trade using the gravestone doji means entering a short position, you should place a stop loss to avoid huge losses should the price go in the opposite direction. You should place it slightly above the longer upper shadow. For a more precise position, you can use volume profiling of the asset in question.
You should also have a strategy to reap profits; otherwise, entering the market will be futile. To do this, you should use the candle wick to enable you gauge where your first profit target should be. In essence, you should set the profit at the same size as the gravestone doji.
The Fibonacci levels will come in handy at this point. It will help you identify the best place your first profit target. As such, you can also set the next profit target double the first one. Alternatively, you can use tools such as TD sequential and Elliot wave to come up with more precise points.
Drawbacks of the Gravestone doji
· It is rare for the gravestone doji to form since the close, open, and low prices are rarely the same. What appears to be a gravestone doji might be an inverted hammer.
· Gravestone doji is not reliable since you have to wait for the next candlestick(s) to confirm the price movement. It is for this reason most traders wait for the next trading day to verify the downtrend.
· While gravestone is synonymous with a downtrend, its formation can also indicate a possible price rise, especially if it forms after a price downtrend.
· You cannot rely on gravestone doji alone. You’ll need to use other indicators such as RSI and MACD to confirm the impending price movement. Otherwise, you might make huge losses.
Are the odds of the Gravestone Doji pattern in your favor?
As mentioned, it is not advisable to use Gravestone Doji alone. Instead, integrate other indicators for precise chart reading. So, how well does this indicator perform? Let’s find out.
In a risk/reward (R/R) ratio with a 2:1 target it confirmed 39.9% while the entry price was retested 89.1%. And on the wider market, the Gravestone Doji conformed 47.5% of the time out of the 4120 markets that were analyzed.
It takes 5.5 candles to confirm it and 5.6 to invalidate the price movement. With a 0.196$/$ expected outcome, you can earn $19.6 for every dollar you risk. Historical data shows relying solely on Gravestone Doji can lead to huge losses.
A study showed in 2:1 target trades, the indicator confirms 60 times while it is invalidated 368 times. Besides, the gravestone Doji formed after 78 candles.