Trading the Gravestone Doji – Bearish Reversals

The gravestone doji is a bearish candlestick pattern that usually appears in trend tops and in down trends.

What is a doji?

In Japanese candlestick terminology, a doji is a special type of candlestick that occurs when the price opens and closes at the same level. This means the candlestick has little or no body at all.

Figure 1: Doji candlestick types
Figure 1: Doji candlestick types © forexop

Usually a doji will have a shadow and that means that the price moved upwards and downwards but it settled back to the same level at the close.

A doji marks a brief period of hesitation in the market. It can warn of a consolidation, continuation or a reversal/pullback of a trend. For that reason the situation of the doji pattern needs to be carefully analyzed before trading.

Dojis can appear on any chart even though most candlestick traders use either the four-hourly or the daily chart as their reference.

Gravestone Doji

The gravestone doji takes its name from its shape – a flat body with an upward pointing line (the grave stone).

Figure 2: Bearish gravestone doji
Figure 2: Bearish gravestone doji © forexop

With this pattern the open price, close and low are all the same. The price does however make some upward movement as marked by the upper shadow. To be a valid signal the upper shadow should not be too short, otherwise it becomes more ambiguous.

If the body of the candlestick is not flat, the pattern is then an inverted hammer.

Trading the Gravestone Doji

A long upper shadow in the doji means that the price has increased during the period but the market failed to consolidate at the new level. In other words the new highs could not be held and the price fell all the way back to the day’s low which was also the open price.

While in itself this might not be significant, when looked at against other markers on the chart it can be a bearish warning sign.

A trend that’s unable to consolidate

A gravestone doji can be a sign that an uptrend has moved too high, too quickly. This can mean some retracement is necessary before new highs can be made. In this situation the gravestone marks a period of hesitation in a bullish trend.

This can forewarn either of some further price consolidation and ranging or more likely of a bearish pullback.

For that reason we pay more attention when the gravestone appears after a rapid price increase.

In this case the gravestone doji is more likely to be signaling a reversal because the market needs more time to digest the new price levels.

Selling the “gravestone”

Remember that the gravestone is only a single candlestick marker, so it represents only a snapshot of the market’s activity at a point in time.

Before shorting the market or selling long positions it is really important to analyze the trend in some detail and try to assess where the strength lies. Otherwise it could mean selling into a bullish trend, which is obviously something we want to avoid.

Figure 3: Typical example of gravestone dojis on USD/CAD daily chart
Figure 3: Typical example of gravestone dojis on USD/CAD daily chart © forexop

Pointers to look for include:

  • It appears in an uptrend
  • The gravestone shadow breaks or is near a new recent high in the trend
  • The price channel: If the price is approaching an upper resistance (bearish) or has recently broken through an upper resistance (bullish). Examine the Bollinger and Pitchfork.
  • The trend is looking overbought and is due a pullback
  • Is the market forming into a recognizable bearish chart pattern, e.g. a top, a wedge or a flag?
  • Is the price consolidating after an aggressive bullish breakout? If so, the risk is to the upside

The example in Figure 3 shows a typical case. Here a bullish wave tops with a gravestone doji. Three bullish white candles appear, and following this is the first gravestone doji. This indicates a possible retracement as the market starts to look overbought in the near term.

A bearish candlestick appears next and then another gravestone doji as marked with the blue arrows. Presumably at this point the bulls are looking for an upswing and for the trend to turn bullish again. Once the retracement is over the trend resumes in the same direction.

Waiting for bearish confirmation

If the situation is less clear we would wait for a confirmation of a bearish reversal before selling. This won’t be any guarantee but it does provide a clue that more price falls are to come.

Here we wait for the next candlestick to close after the gravestone doji. A bearish candle gives another hint that a pullback is underway and that the bulls are in retreat. If the market closes overnight and the price gaps lower at the open the next day, this increases the chance of a bearish reversal.

Gravestone Doji in Bearish Trend

This doji pattern is quite commonly found in downtrends as well.

Figure 4: Gravestone doji in downtrend
Figure 4: Gravestone doji in downtrend © forexop

These cases typically lead to a continuation of the bearish trend rather than a reversal.

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