The Complete Guide to Gravestone Doji Candlestick Patterns in Technical Analysis
The gravestone doji is a fascinating and potent candlestick pattern that every trader should know. This unusual doji formation can signal major reversals and trading opportunities if you know what to look for.
In this comprehensive guide, you’ll learn everything you need to know about gravestone doji patterns, including:
- What a Gravestone Doji Is
- Gravestone Doji Formation
- Psychology Behind the Gravestone Doji
- Gravestone Doji vs. Dragonfly Doji
- Types of Gravestone Doji Patterns
- How to Trade the Gravestone Doji
- Doji Candle Strategies and Techniques
- Tweezer Tops and Bottoms
- Combining with Other Indicators
- Volume Analysis
- Common Mistakes to Avoid
- Gravestone Doji in Real-World Examples
- And Much More!
By the end of this complete gravestone doji guide, you’ll be a pro at identifying, confirming, and profiting from one of the most powerful candlestick signals.
Let’s get started!
What is a Gravestone Doji?
A gravestone doji is a candlestick pattern that signals potential trend reversals. It is formed when the opening and closing prices of the candle are near the low of the day, creating a long upper shadow and no lower shadow.
The long upper wick resembles the gravestone shape, which is how this pattern earned its ominous name. It is considered a variation of the doji candlestick.
Doji Candle Explained
A doji candlestick forms when the opening and closing prices are virtually equal. The length of the candle body is very small or nonexistent.
Doji candles represent market indecision – a tug of war between buyers and sellers coming to a standstill. This struggle creates larger than usual wicks above and below the candle body.
There are various types of doji patterns, with names often related to their appearance, such as long-legged doji, dragonfly doji, gravestone doji, and four-price doji.
Gravestone Doji Characteristics
A gravestone doji exhibits these defining features:
- Virtually nonexistent candle body – The open and close are very close to each other, often creating a thin horizontal line as the body.
- Long upper shadow – The top wick extends significantly above the body, emphasizing the session high. It is usually twice the height of the body or more.
- Little or no lower shadow – There is typically no lower wick or a very tiny one.
- Appears near previous swing high or low – Gravestone dojis often form near recent trend turning points or support/resistance areas.
The long upper wick signals that buyers pushed prices higher but ultimately met strong selling pressure that reversed the price back down near the open by the close.
This inability to hold the higher levels shows potential exhaustion of the prevailing trend, especially near swing highs or lows.
Gravestone Doji Formation
Now let’s break down exactly how and where gravestone doji patterns take shape in the market.
Where Gravestone Dojis Form
Gravestone dojis typically form at the peaks and troughs of trends and ranges. Some common locations include:
- Near the swing high of an uptrend – Signaling potential trend reversal from bullish to bearish.
- Near the swing low of a downtrend – Signaling a potential shift from bearish to bullish.
- At resistance levels – Such as previous peaks or Fibonacci/moving average levels during uptrends.
- At support levels – Such as prior lows or Fib/MA support in downtrends.
- End of a sideways consolidation range – The disrupted equilibrium may give way to a new trend.
The gravestone doji’s message is most meaningful when it appears near inflection points for the current trend.
Preceding Candle Analysis
It’s useful to look at the candle immediately before the gravestone doji for confirmation.
A long bullish candle preceding a gravestone doji at resistance enhances the reversal signal. It shows growing momentum stalling and reversing.
Conversely, a long bearish candle before a gravestone doji at support confirms the pattern as a sign of buyers overtaking selling pressure.
Smaller or indecisive candles beforehand reduce the potency of the signal.
Volume Clues
Volume can provide additional context around gravestone dojis:
- High volume on the gravestone doji candle reinforces the credibility of the reversal signal. High activity shows a battle between bulls and bears.
- Low volume suggests a lack of commitment behind the signal. Look for an expansion of volume on subsequent candles for confirmation.
- Unusually high volume on the previous candle may set up exhaustion leading to the gravestone doji. Heavy traffic ahead of a reversal is constructive.
As with any chart pattern, volume should be analyzed in the context of recent trends and norms for the asset to determine unusual activity.
Example Gravestone Doji Formation
Here is an example of a gravestone doji forming at resistance after an uptrend:
Notice how the uptrend leads into the gravestone doji precisely at the prior swing high resistance level around $106.
The virtually nonexistent body and long upper shadow signal the market rejecting higher prices. This preceded a bearish trend reversal confirmation over the subsequent trading days.
The Psychology Behind the Gravestone Doji
The gravestone doji reveals a transition in the market’s crowd psychology at potential turning points.
In an uptrend, surging optimism flips to concern and uncertainty. In downtrends, fear transforms into skeptical optimism.
Let’s explore the psychological shifts that create gravestone dojis.
Uptrend Psychology
During a strong advance, market psychology is dominated by greed, excitement, and optimism. Traders are confidently buying dips and momentum seems unstoppable.
Approaching key resistance, fewer buyers remain willing to chase prices higher. The market tests the highs and stalls. Optimism wanes amid worries of a correction.
The gravestone doji captures this shift from greed to concern. The long upper shadow shows buying interest fading and the rally losing steam. This opens the door for a bearish reversal as optimism frays.
Downtrend Psychology
In a decling trend, pessimism and fear take over. Traders aggressively sell rallies and braced for more losses. Capitulation looms.
Near major support, the pendulum begins to swing. Bargain hunters emerge looking to “buy the dip” as prices appear attractive.
Sellers unload positions to book profits or cut losses near support. The market probes below support briefly but dip-buyers overwhelm selling pressure. Fear turns to skeptical hope.
The gravestone doji signals this exhausted pessimism and transition to cautious optimism through the long lower wick. The uptick in buying reveals the downtrend may be ending.
Market Indecision
During trading ranges and at inflection points, conflicting emotions lead to indecision. This creates choppy congestion on the charts.
The tug of war between hope and fear, greed and uncertainty forges the long-legged gravestone doji candle. Each side briefly gains control intraday before the stalemate returns.
This precarious balance ultimately gives way to a new trend as sentiment aligns. The gravestone doji flags this turning point is nearing.
Difference Between Gravestone Doji and Dragonfly Doji
The gravestone doji has an opposite counterpart known as the dragonfly doji. Let’s compare their distinctions:
Dragonfly Doji
- Long lower shadow, small or no upper shadow
- Forms at swing lows of uptrends or swing highs of downtrends
- Signals potential trend continuation, not reversal
- Reveals optimism and confirmation of support/resistance
Gravestone Doji Differences
- Long upper shadow, small or no lower shadow
- Forms at swing highs of uptrends or lows of downtrends
- Signals likely trend reversal
- Shows concern, uncertainty, and faltering momentum
While their construction is nearly identical, the interpretations are opposites based on where they form relative to the trend.
Types of Gravestone Doji Patterns
There are a few common variations of the gravestone doji pattern. Let’s examine their unique signals.
Long-Legged Gravestone Doji
This extended gravestone doji has exaggerated long upper and lower shadows bracketing the slim body.
The extended wicks display intense back-and-forth trading during the session. Selling pressure finally prevails, forcing the close near the open price.
Long-legged gravestones represent heightened volatility and uncertainty ahead of a reversal. The wide trading range combined with the close near the lows hints the trend is culminating.
Inverted Gravestone Doji
This is essentially a gravestone doji upside down – a small upper shadow and long lower wick with a doji body.
While rare, the inverted gravestone doji can form in downtrends signaling the selling pressure is exhausted and trend change ahead.
Look for them near major support levels or positive divergence for confirmation. The message remains similar to a standard gravestone doji.
Gravestone Doji Cluster
When multiple gravestone dojis form in close proximity, it signals strong indecision and likelihood of a reversal.
These gravestone doji clusters represent a battleground zone where bulls and bears are deadlocked. The clustered reversals warnings flag an impending breakout.
After 2-3 gravestones, volatility will eventually explode in one direction as the unbalanced sentiment gets resolved.
Closing Marubozu + Gravestone Doji
A closing marubozu candle followed by a gravestone doji is a potent combo. The marubozu shows momentum culminating in a long body candle.
The next session’s gravestone doji serves asconfirmation of the slowing momentum and trend exhaustion. This pattern combination frequently precedes reversals.
How to Trade the Gravestone Doji
Now that you know how to spot gravestone doji patterns, let’s discuss strategies and best practices for trading them.
Signals and Interpretations
The gravestone doji signals potential trend exhaustion, reversal, or breakout ahead when appearing at inflection points.
Some key interpretations:
- Near uptrend swing highs: Expect reversal lower. Bears overtaking bullish momentum.
- Near downtrend swing lows: Anticipate trend change higher. Bulls outpacing selling pressure.
- In trading ranges: Flags the equilibrium is fragile and a new trend developing.
- On high volume: Adds weight to the signal of shifting momentum.
- After marubozu candle: Confirms preceding exhaustion.
- In clusters: Warns of volatile breakout as sentiment builds.
Entry Strategies
When trader a gravestone doji, there are a few entry tactic options:
- Wait for confirmation next candle: The safest route is to wait for the next 1-2 candles to confirm the direction before entering. For uptrend reversals, a close below the gravestone’s low would confirm. In downtrends, a close above the pattern’s high confirms a reversal.
- Enter on close of gravestone candle: More aggressive traders could enter long/short on the actual gravestone doji’s close with a tight stop. The danger is a false signal and stop-out.
- Fractal combinations: Enter when the pattern combines with confirming fractals, Fibonacci levels, or candlestick combinations. This improves accuracy.
- Existing position direction: For active trends, use the gravestone to trail stops or book partial profits expecting a correction. In ranges, the doji can trigger exiting range trades.
Stop Loss Placement
Intelligent stop loss positioning is critical when trading gravestone dojis:
- Uptrend reversal: Place stops above the high of the candle, or just above key resistance levels.
- Downtrend reversal: Stops below the gravestone low or under support.
- Range breakouts: Wider stops allowing for volatility. Above resistance for short setups and below support for longs.
- No lower wick: If there is no lower shadow, use body high as the stop level.
Adjust stop widths based on volatility (ATR). Trail stops to lock in profits as the reversal plays out.
Profit Taking Approaches
Planning upside price targets helps maximize rewards and discipline:
- Previous support / resistance flip: For reversals, target previous levels which may flip polarity. Popular flip areas are broken trendlines, moving averages, Fibonacci levels, pivot points, and chart fractals.
- ATR multiples: Project ATR volatility multiples to forecast reasonable target zones. For example, 2-3x the 14-day ATR from entry.
- Chart patterns: Look for repeating candlestick patterns or chart formations pointing to target areas. Bullish patterns in uptrend reversals and bearish in downtrend reversals.
- Partial profits: Scale out portions of the position at psychologically significant intervals. For example, closing 25% at a 1:1 risk reward, 50% at 2:1, and the final 25% at 3:1 or later.
Doji Candle Trading Tips and Strategies
While this guide focuses on the gravestone doji, the concepts apply to doji trading broadly. Keep these extra tips in mind:
- Doji clusters reveal key reversal zones. Wait for the breakout trigger rather than anticipating.
- Small dojis have lower potency than large, pronounced doji bodies and wicks. Prioritize high-range dojis.
- Volume context matters. Higher than average volume adds significance compared to quiet dojis.
- Combine dojis with other patterns for added confirmation, such as harmonics, candle clusters, and chart shapes.
- Use larger timeframes to identify high probability doji reversal setups. The signal is stronger on daily/weekly charts than 5-minute for example.
- Respect support/resistance levels. A doji directly on or just above/below key levels has higher accuracy.
- Approach intraday dojis with caution. Intraday noise and volatility can create many false signals. Consider them in conjunction with the larger context.
With proper strategy, the influential doji candle family offers immense predictive power around trend reversals.
Tweezer Tops and Bottoms
Tweezer tops and bottoms are closely related to gravestone and dragonfly dojis. Let’s explore how to trade these patterns.
Tweezer Top Formation
Tweezer tops form when two candlesticks have matching highs with little or no lower wicks. The dual matching tops resemble tweezers pinching the price.
It signals potential reversal lower from an uptrend or resistance, similar to gravestone dojis. Bearish sentiment overpowering bulls.
Tweezer Bottom Formation
Tweezer bottoms create matching lows with small upper wicks, pinching the price at support. They indicate possible reversal higher, like dragonfly dojis. Renewed optimism outpacing pessimism.
Trading Tactics
Strategies for tweezers align with gravestone and dragonfly doji techniques:
- Trade after confirmation of the reversal by waiting for a close breaching the pattern.
- Enter on completion of the 2nd candle, using a stop under bottoms or over tops.
- Combine with other reversal indicators like divergences for added confluence.
- Focus on tweezers at major support and resistance levels.
- The larger the candles and tails, the higher the significance.
Tweezers are simple yet powerful tools to confirm and trade trend reversals. Add them to your chart pattern toolbox.
Combining Gravestone Doji with Other Indicators
For improved accuracy, corroborate gravestone doji signals using complementary indicators:
Volume Analysis
As mentioned, evaluating volume can diagnose the health of a gravestone doji signal. Rising volume on the pattern itself or on the confirmation candle points to conviction behind the reversal.
Volume can also identify exhaustion ahead of gravestone dojis when it climbs well above average on preceding candles and the trend. Heavy volume highlights overextension.
Momentum Divergence
Momentum oscillators such as RSI, MACD and stochastics help identify bullish or bearish divergences. Divergence with price ahead of a gravestone doji provides reliable confirmation.
If momentum is waning before a top reversal or building before a bottom reversal, it adds confidence to the signal. The gravestone doji may mark the point where momentum redirects.
Moving Average Crossovers
Price crossing key moving averages like 20 and 50-day EMAs after a gravestone doji helps confirm trend shifts. These moving average crossovers reflect changing momentum.
Bullish crossovers above MAs validate uptrend reversals. Bearish crossovers below MAs confirm downward trend changes.
Overbought/Oversold Levels
Oscillators signaling overbought or oversold conditions reinforce gravestone doji reversal potential at extremes.
Overbought readings suggest an uptrend is overstretched, making the case for an impending correction signaled by a doji top. The opposite applies for oversold and bottoms.
Other Candlestick Patterns
Additional candlestick indicators like engulfing patterns, shooting stars, marubozus, and harami crosses can augment gravestone doji reversals when combined.
Clustering candlestick patterns with distinct messages reflects meaningful turning points ahead. The gravestone doji can offer early warning.
Real-World Gravestone Doji Examples
Now let’s examine gravest
Bitcoin Gravestone Doji
This daily chart shows Bitcoin printing a gravestone doji right around all-time high resistance near $20,000 in late 2017:
[Image of Bitcoin gravestone doji candlestick chart]
This gravestone doji reversal signaled the end of Bitcoin’s meteoric bull run and preceded a long bear market. The long upper wick showed buyers unable to sustain the uptrend.
Zooming into the 1-hour chart, you can see multiple gravestone and dragonfly dojis forming around the peak as bulls and bears battled:
[1-hour Bitcoin chart with dojis]
Shorting after the daily gravestone doji and 1-hourconfirmations resulted in strong profits during the 2018-2020 crypto bear market.
Gold Gravestone Doji
This daily gold chart highlights a gravestone doji appearing right at resistance around $2060 in August 2020:
[Gold daily chart with gravestone doji]
The long upper wick showed buying pressure stalling at multi-year high resistance. The doji preceded a sharp decline as sentiment turned bearish.
Adding RSI bearish divergence would have enhanced the signal. Selling gold after the gravestone doji or on the confirmation candle would have generated solid returns.
S&P 500 Gravestone Cluster
The S&P 500 printed four gravestone dojis in a tight cluster in September 2019, signaling indecision at the all-time highs:
[S&P 500 daily chart – gravestone doji cluster]
This gravestone cluster marked a major topping pattern. The intense back-and-forth highlighted distribution underway. Sure enough, a sharp selloff followed this gravestone doji combination at resistance.
USD/JPY Inverted Gravestone
While less common, inverted gravestone dojis can form potential bottoms. Here is an example on USD/JPY daily chart in 2020:
[Inverted gravestone on USD/JPY daily chart]
This inverted gravestone matched the 2018 lows and kicked off an aggressive upside move. Bulls defended support despite bearish momentum, hinting at a trend change.
Buying on bullish confirmation the following day yielded a strong uptrend. The lower wick showed dip buyers stepping in and reversing the pair higher.
Common Mistakes to Avoid
While powerful when traded correctly, gravestone dojis can lead to mistakes and losses. Here are common errors to sidestep:
- Lack of confirmation – Entering on the gravestone doji rather than waiting for confirmation of the reversal. This can trigger false signals and failed trades.
- Insufficient stop loss – Not giving enough room for volatility with stops. Wider stops above resistance or below support are safer.
- Illiquid markets – Chasing gravestone dojis in thin, volatile markets often leads to slippage on entries and wider stops. Look for liquid assets.
- Ignoring key levels – Blindly trading every gravestone doji rather than focusing on high probability setups at significant swing points. Context is critical.
- Going against major trend – Relying on reversals against very strong, high momentum trends typically leads to losses. Trade with the prevailing trend bias.
- Over-optimizing – Curve fitting to past gravestone dojis without forward testing. This creates bias. Remain objective when assessing strategy results.
With proper precautions, gravestone dojis can offer dynamic trend reversal trading opportunities in many markets.
Conclusion
Gravestone dojis are powerful candlestick chart patterns signaling impending trend reversals. With the right context, they provide advanced warning of trend changes at inflection points.
By mastering gravestone doji identification, combine them with volume, indicators, and key levels to trade reversals with confidence. Remember to wait for confirmation entries to avoid false signals.
Gravestone dojis remind savvy traders that no trend lasts forever. Sentiment constantly evolves from greed to fear. By tracking this psychology, gravestone dojis flag areas of opportunity well before the crowd.
Yet gravestone dojis are just one tool in the trader’s toolkit. Combine them with larger technical and fundamental analysis when evaluating high probability setups. Integrate gravestones as part of a robust, objective system.
With the knowledge from this complete gravestone doji guide, you have an advantage. Now it’s time to put these strategies into practice, refine your timing, and discover how gravestone dojis can lead to more winning trades.
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