Understanding the Concept of Gravestone Doji and Its Types

Beginners in trading might start making decisions without research and analysis. Beginners need to understand the technical and fundamental analysis techniques. You might fail to make informed trading decisions without investment research techniques. This is a significant candlestick pattern that indicates a trend reversal. Read on to understand the Gravestone Doji candlestick pattern in detail.

What is Gravestone Doji?

Gravestone Doji is a bearish candlestick pattern formed after the price action sequence. The price action sequence involves plotting an asset’s price movement for a given period on a chart. When you plot the price movements, you might notice a pattern that looks like an inverted ‘T’. This pattern appears during an uptrend when prices are high and indicates a trend reversal, thus hinting at a bearish market.

Gravestone Doji is an essential pattern of the Doji family, which allows investors to take better market positions. Classic Doji, Long-legged Doji, Dragonfly Doji, Four-price Doji, Northern Doji, and Southern Doji are other patterns in the same category. These patterns might indicate market indecision, trend reversal, or balance between sellers and buyers. A pattern appears when open and close prices of an asset are almost or entirely the same. Also, the open and close prices are near the lowest price in the given session.

How Does the Gravestone Doji Candle Look?

You can identify a Gravestone Doji candle as an inverted ‘T’ in the chart. Also, the upper shadow of the pattern is lengthy. The pattern’s main body is towards the candle’s lower side. This formation indicates that the open, close, and lowest prices are nearly or entirely the same. There is minimal or no lower shadow of a pattern in a chart.

Recommended Read: What are Stock Chart Patterns

You might wonder why there is no or minimal thin line (shadow) below the candlestick pattern. It happens when the lowest price during a trading session is close to the closing price. On the other hand, the upper shadow of a Gravestone Doji pattern is longer than the lower shadow. However, the length of the candle’s upper shadow might change from one pattern to another. The pattern represents the struggle between sellers and buyers, which resulted in sellers winning and pushing the prices down.

How is the Gravestone Doji Candlestick Pattern Formed?

As discussed above, the pattern is formed when the opening and closing prices of an asset are nearly the same in a given trading session. Also, the asset’s closing price is close to the lowest price in the trading session. It happens when there is stiff competition between the bulls and bears in the market. However, the bears win the competition and form a complete Gravestone Doji pattern.

Gravestone Doji is usually formed on top of an uptrend. However, there have been cases where the pattern has appeared at the bottom of a downtrend in the chart. For the same rationale, investors must confirm the formation of these patterns before making a decision. The pattern is formed when bulls push the price up, but resistance from the sellers brings the price down to the session’s opening price. It indicates that the bullish sentiment in the market has been completely rejected.

Types of Doji Patterns

Now that you have understood what Gravestone Doji is, it is time to discuss the other Doji patterns. Besides Gravestone, here are the other Doji patterns for investors:

• Classic Doji

  The Classic Doji appears on the chart when opening and closing prices are almost or entirely the same. A plus or cross sign represents the formation of a Classic Doji on a chart. This pattern represents uncertainty in the market. A trend reversal is also on the cards after the formation of a Classic Doji pattern.

• Dragonfly Doji

  When the opening and closing prices with a trading session are close to the highest price, a Dragonfly Doji pattern is formed. It often appears at the bottom of a downtrend and signals a trend reversal. The bulls might take control of the market after a Dragonfly Doji pattern is observed.

• Long-Legged Doji

  The opening and closing prices are close to each other in a long-legged pattern. The pattern has long upper and lower shadows, also known as wicks. These shadows represent rapid price fluctuations during the trading session. A long-legged pattern is usually observed when the market volatility is high.

• Four-Price Doji

  It is a rare pattern that forms when the opening, closing, high, and low prices are almost the same. A small square is formed when all four prices are almost the same. A Four-Price Doji represents high uncertainty in the market.

Gravestone Doji Vs. Dragonfly Doji

Now that you have understood different types of Doji patterns, here is the difference between Gravestone and Dragonfly Doji patterns:

Trading with Gravestone Doji at the Top of an Uptrend

When the Gravestone Doji is formed after a bullish or up trend, investors must be ready for a reversal in the market. Look for patterns that form at the top of an uptrend. Do not enter market positions immediately after the formation of the pattern. The bulls might attempt to stop the trend reversal. Because of this, it is better to wait for some time before taking market positions based on it. Don’t forget to place stop-loss orders above the high of the candlestick to avoid potential losses. Investors usually enter short-selling positions after the formation of such a pattern.

Trading with Gravestone Doji at the Bottom of a Downtrend

The Gravestone Doji pattern might sometimes appear at the bottom of a downtrend in some cases. It represents the completion of the selling pressure from the market. A bullish trend might start after the pattern appears at the end of a downtrend. In such a case, investors must place stop-loss orders below the low of the candlestick to avoid potential losses. Some investors might take long-buying positions in the market after this pattern appears at the bottom of a downtrend. However, one must always wait for the confirmation of the pattern before taking market positions. 

Limitations

Similar to other technical analysis tools, the Gravestone Doji pattern also has some limitations. New investors must understand the limitations before using it for decision-making. You must not solely depend on this pattern for decision-making. Investors must wait for confirmation of the trend reversal. You can use other technical analysis tools to confirm the trend reversal in the market. The pattern might give false signals where the reversal hasn’t happened in the market.

Recommended Read: What is Intraday Trading

The pattern is usually effective for short-term trading. It has its limitations when used for long-term trading. The pattern also produces false signals in sideways or choppy markets. Over Reliance on this pattern can lead to poor trading decisions. It is crucial to note that the pattern only represents the price trend of a particular asset. It does not include the fundamental factors, like company profitability and valuation.

Conclusion

The Gravestone Doji candlestick pattern is essential for technical analysis and informed decision-making. It helps identify a potential trend reversal and the beginning of a bearish market. However, investors must use the Gravestone Doji pattern in conjunction with other patterns to confirm the trend. It is better to wait for some time and confirm the trend reversal in the market before placing orders. Start using Doji patterns for investment decision-making now!