Gravestone Doji: Meaning, Types & Limitations

The gravestone doji is one of the candlestick patterns that typically indicates a bearish price reversal in the trading spectrum. About 70% of traders in India rely on technical analysis to increase their profit-making potential, making this pattern turn out to be effective in identifying price reversals and informed trading decisions.

What Does a Gravestone Doji Mean?

Among the different and recognised patterns, a gravestone doji is a sort of rare bearish pattern in trading charts. Here is its clearer breakdown:

• When a gravestone doji candle appears in a chart, it typically indicates a potential reversal in the price trends of an asset.
• You can spot this candlestick pattern easily as it resembles a form of an upside-down ‘T’. It means that such a candlestick has a longer upper shadow and has a minimal lower shadow.
• Suppose a stock of any company is valued at INR 150, which shows almost no changes in its opening and closing prices. Also, the closing price is close to its lowest price in the trading session.
• Here, the existing buyers might try to push prices upward, and the price reaches INR 165.
• Now, if any scenario of heavy selling occurs, it pushes the price close to INR 150. Such a scenario completely ignores the rising trend in the stock prices, and thus, a gravestone doji gets created.

Different Types of Doji Patterns Spotted in Trades

Apart from learning about the gravestone doji candle, you must take note of other sorts of dojis that might help during trades and might help forecast price movement. Here are 4 other types of Dojis that you must know about:

1. Classic Doji

   A classic doji, unlike the gravestone doji, typically indicates uncertainty in the price movement and here is a detailed view:

   • When you are observing a chart, you might encounter a classic doji, when the opening and closing prices of an asset are the same. Suppose a stock opens and closes at INR 200; it might form a classic Doji.
   • Also, if you spot a cross or a plus sign in a chart, it typically indicates the formation of a classic Doji.
   • Although it leads to uncertainty, a trend reversal might be close following its formation.

2. Dragonfly Doji

   This Doji typically forms in highly volatile markets such as the commodity markets. Its form is like a ‘T’ with only a bottom tail but no upper tail:

   • This pattern typically forms when the opening and closing prices of an asset are close to its highest price during a trading session.
   • It usually appears at the bottom part of a downtrend and indicates a potential trend reversal. This means there is a chance of bulls taking over and driving the prices high after it forms.

3. Long-Legged Doji

   While learning about the gravestone doji, take a look at the long-legged Doji, as it might also help with trading:

   • Suppose a stock opens at INR 150, moves between INR 140 and INR 160 during the session, and it closes at INR 152. Such a price movement might lead to a long-legged Doji formation.
   • You can identify this as it has longer upper shadows and smaller lower shadows that are called wicks.
   • These shadows represent the fluctuation in asset prices during a trading session.

4. Four Price Doji

   Similar to a gravestone doji candle, it also forms rarely in the chart and has the following characteristics:

   • A four-price Doji typically appears as a flat and horizontal line in the chart.
   • It typically forms when the opening, closing, lows and highs of an asset price in a trading session are almost the same.
   • It indicates uncertainty of price movement in the market.

Trading Strategies for Gravestone Doji

You can use a gravestone doji during day trading on charts for 5, 15 or 60 minutes and for other sorts of trades. However, you must follow a strategy for potential benefits:

• When the opening and closing prices of an asset are near the lowest prices, this pattern usually forms. You must identify such a scenario and look for an inverted ‘T’ for your preferred stock.
• Now, wait for a bearish candle to appear close to and below the low of the gravestone doji or use a bearish signal like a bearish divergence.
• You might consider opening a short position once the pattern is confirmed, and set the stop-loss to reduce risk above the high of a gravestone doji candle.
• Now monitor the trade pattern and adjust your position accordingly by looking at the new price actions, conditions of the market, etc.

Key Characteristics of Gravestone Doji in Trading Charts

The structure of the candlestick, the uptrend in prices, etc., leads to a gravestone pattern and here are some of its characteristics:

• One of the key characteristics of the gravestone doji candlestick pattern is that it provides a bearish reversal signal. This means market sentiment might shift from bullish to bearish.
• The longer upper shadow of the candlestick shows a higher selling pressure and indicates that the bearish sentiment is taking over the bullish.
• Such a signal is typically strong if it appears after a strong uptrend. If a stock rallies from INR 100 to INR 120 and then forms a Gravestone Doji at INR 120. This might be a signal of a potential reversal.

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Difference Between Gravestone Doji and Dragonfly Doji

Here are 4 key differences between the gravestone doji and the dragonfly doji

Limitations of Gravestone Doji

Chances of fall breakouts, low trading volume, etc, limit the credibility of this pattern:

• Even when the market goes sideways without a definite trend, a gravestone doji candlestick pattern might occur. This might result in false breakouts and generate signals without meaning.
• This pattern is considered less reliable if the trading volume is low. This is because volume is a potential indicator of whether the chances of reversal are real or not.

Conclusion

The gravestone doji forms usually when any stock opens and closes at a price close to the lowest price of that stock in a trading session. This indicates a bearish reversal, meaning the market sentiment might turn from bullish to bearish.

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FAQs on Gravestone Doji

1. What does a gravestone doji indicate?

Typically, after a strong upward trend in a stock price, gravestone dojis indicate a potential bearish reversal.

2. What timeframe is best for a gravestone doji?

This doji might appear at any point in time, but these are considered more significant in day trades (5, 15, or 60 minutes or 4-hour) charts and on weekly charts.

3. What is the meaning of a 4-price doji?

It usually appears when opening, closing, low and high prices of an asset are the same in any trading session.

4. What is the opposite of a gravestone doji?

Based on the characteristics, a dragonfly doji is the opposite of a gravestone doji.