Gravestone Doji Pattern: Candlestick patterns are the key technical tool for traders to understand price movements. The patterns formed on candlestick charts over a given time frame offer potential views on trend reversals, continuations, or indecision in the market. In this article, we will delve into the Gravestone Doji, exploring its meaning, characteristics, and strategies with the example of charts.

What is a Doji?

The word Doji is derived from the Japanese word, meaning “the same thing”. The Doji is a candlestick pattern in which a candle’s open and close price is almost one and the same. Generally, the doji formation represents the indecision present,  a sign of trend reversal or continuation in the security. 

The pattern suggests that neither bulls nor bears have gained control, creating uncertainty in the security. It appears as a candlestick with a small or no body with nearly identical upper and lower wicks. 

Gravestone Doji Pattern

It is a type of Doji candlestick pattern formed by a long upper shadow with the same open, close and low price or with a tiny body. Unlike the Doji star, which indicates indecision, the gravestone candlestick signals a reversal. Gravestone Doji is more reliable when formed at the end of an uptrend, signalling the possibility of a bearish reversal.

The pattern formation indicates buyers try to push the price higher, but the market rejects the buyers, causing the price to move down and close at the candles opening price. Even though the gravestone Doji formation is uncommon, a valid pattern should be identified. Also, it is similar to the inverted T or an inverse of the dragonfly doji pattern.

What Does the Gravestone Doji Mean?

The Gravestone Doji is a clear signal of bearish sentiment in the market. It signifies a reversal from existing bullish pattern.

The pattern formation implies:-

• Reversal Signal: The Gravestone Doji typically appears after an uptrend. It signifies that the bulls’ are weakening, and the bears may soon take control. Traders should be on alert for a potential trend reversal.
• Indecision: While the Gravestone Doji is a bearish pattern, it also indicates market indecision. The long upper shadow reflects the struggle between buyers and sellers, suggesting uncertainty about the future direction of the asset’s price.

Trading strategies with Gravestone Doji 

With a good understanding of the Gravestone Doji pattern formation and its significance, let’s explore some trading strategies.

Bearish reversal 

In a strong uptrend, the formation of the Gravestone doji pattern indicates the end of a bullish trend. It signals a reversal for traders to consider entering short position.

Entry:- Enter a short position in a security when the price closes below the low of the Gravestone Doji pattern formation.

Stop loss:- The logical stop loss will be set at the high price of the gravestone doji pattern.

Profit Target:- As the pattern doesn’t define any profit target levels, you can place the targets based on the risk-reward ratios or the next support level spotted on the chart.

Chart of HDFC Bank depicting the formation of Grave stone doji pattern formation.

Profit booking in a long position 

The pattern formation helps traders to spot technical exits to the existing positions in the security. If you have placed a long position in the security, the formation of the Gravestone doji pattern indicates an indecision or trend reversal. Hence, traders can square off the existing long position after the formation of the pattern to limit the further cut in profits.

Gravestone Doji with Moving average

The Gravestone Doji pattern is combined with a short-term moving average as a double confirmation to avoid false signals generated. We know that the formation of Gravestone Doji indicates trend reversal and initiates an entry to a short position. To confirm the entry by pattern formation we shall apply the moving average to the chart. 

With the pattern formation, when the price closes below the moving average, you can place a short position as a pattern and the moving average confirms the entry.

In the below chart, it can be observed that the 5 min chart of AXIS Bank shows the formation of a pattern and price below 5 EMA. Double confirms an entry with a good risk-to-reward ratio.

Limitations of Gravestone Doji

While the Gravestone Doji is a powerful reversal signal, traders should also be aware of its limitations:

• The gravestone doji pattern can produce false signals (sometimes with low volumes), leading to losses.
• The effectiveness of the pattern may vary depending on market conditions.
• The pattern formation with a prior downtrend is often not so reliable.

In Closing

The gravestone doji is a key tool for traders to identify a potential bearish reversal in the security. Understanding its formation, strategies and limitations, helps traders to make informed trading decisions.

Traders should always confirm the pattern formation in conjunction with other technical tools to avoid false signals. Also, having proper risk management with good risk-reward ratios and practice makes a trader profitable in the long run. 

Written by Deepak M

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