Gravestone Doji – Types of Doji Candlestick

A Gravestone Doji pattern is a particular type of Doji Candlestick Pattern that can be very powerful in detecting price signals of an asset. In our last post, we discussed the basics of the a Doji Candlestick. Today, we will explain the Gravestone Doji in a simple way that will immediately make you a better trader.

In this post we will breakdownthe Gravestone Doji Candlestick by understanding the meaning of what it's trying to tell us. This will ensure that you don't have to memorize the candlestick name. In fact, once you're done reading this post, you'll never have to reference it again.

Gravestone Doji – A Bearish Doji Candlestick

The Gravestone Doji suggests that the bears took the bulls down at the very last moment. Despite having the initial pump (refer to high), the bulls couldn't hold price past the candlestick Open. The gravestone doji is indicative of a massive bear victory.

Gravestone Doji: Meaning & Psychology

The Gravestone Doji can be traded most effectively once a trader understands the meaning and psychology behind the pattern. Most traders attempt to memorise various patterns. This is extremely unfeasible and ineffective because each candlestick pattern is context-dependent. Once a trader understand the meaning behind the candlestick pattern, he will be able to trade the pattern in every context. In this article, we will provide examples of the Gravestone Doji Pattern in the following contexts:

1. Gravestone Doji in a Downtrend
2. Gravestone Doji in a Uptrend
3. Gravestone Doji at the Bottom
4. Gravestone Doji at the Top

Let's start with understanding the "meaning" of a Gravestone Doji Candlestick. In order to do this, we will walk through a scenario where a Candlestick Pattern is in the process of being formulated, but has not yet formed just yet. On each phase of the Doji Candlestick, we  will explain the meaning we can derive from the pattern as the candle shapes itself.

There are three images below, each depicting various stages of a Candlestick pattern. Let's assume that the Candlestick represents a single day's worth of price action.

In the first image we can see a big green full body candle: 

What information is this providing us? What can we derive from this? We can start by looking at the OHLC of the Candlestick.  We notice that the Open and Low are both at $1, and the Close and High are both sitting at $5. Interesting...

With this information, we can derive a story from the current phase of the candle. Since the low of the market matches the open of the market, we conclude that the bulls pushed the price up as soon as the candle opened. We don't have even the slightest of wicks under the open.  With this we can conclude that the bears have not been able to exert any pressure on the bulls whatsoever.

In fact, the bulls pushed price up all the way to the $5 mark. As depicted in the image, this is the HIGH of the candlestick as well as the current "CLOSE" of the candlestick. But remember, the candlestick hasn't officially ended yet. We are watching it as it develops through the day. That being said, at it's current stage we can conclude that the bulls are in firm control 

Now let's take a look at the second phase of the Gravestone Doji pattern...

Once again, we will begin with an analysis of the OHLC of the candlestick. In this phase of the candlestick pattern, we can see that the HIGH and the CLOSE of the candle are no longer matching.  The HIGH of the candle is still $5. However, the current CLOSE of the candle is now sitting at $3. 

What does this tell us? With this new information, what can we add to our story thus far?

Well, at this current phase of the Gravestone Candlestick pattern, the Bears seem to be finally applying some pressure on the Bulls. The Bears have managed to push the price down from the HIGH of $5 back to $3.

Keep in mind, however, that this isn't the final phase of the candlestick. Until the candle officially  "closes", the Bulls may still be able to push the price back up and re-assert their former control.  However, on the flipside, the Bears may be able to push the price down even further.

Now let's assess the final stage of the Gravestone Doji Candlestick Pattern:

This is where things get extremely interesting. This is a completely different picture from Phase 1 of the candlestick pattern. Recall that in the first phase of the candlestick pattern, the candlestick depicted a full bodied candle. The full-body candle in the first phase of the candlestick indicated Bull-strength. However, in this final stage we have a different picture to the story. 

Let's perform an OHLC analysis of the candlestick.  We can see the In this stage of the candlestick pattern, the bears have pushed the price down all the way to the OPEN of the candlestick. In fact,  the OPEN, the CLOSE and the LOW are all at the same price of $1.

Essentially, the candlestick Opened and Closed at the same price, despite the magnitude of the initial bullish effort. Such price action usually renders a Gravestone Doji Pattern.  The key points to note are the following:

1. The Bears were able to push the price back down all the way to the initial OPEN of the candlestick.
2. The Bulls were able to defend the OPEN of the candlestick.

The second point is often ignored, but it's extremely important. The Bears were able to step up and put a lot of pressure on the Bulls, and that is definitely a good show of Bear-strength.  However, a good trader should not ignore the fact that the Bears were not able to push the candlestick under the OPEN of the candlestick pattern. This information can be crucial when determining your trades within a bigger context. For example, a gravestone doji in an uptrend may be treated very differently from a gravestone doji in a downtrend. 

Gravestone Doji in an Uptrend

As mentioned earlier in the article, a smart trader will always consider the contextual environment of the Gravestone Doji. A Gravestone Doji in an uptrend will have different trade opportunities compared to that of a Gravestone Doji in a downtrend. In this section we will provide examples of how to trade a Gravestone in an uptrend.

The following image is an illustration of an uptrend leading to a Gravestone Doji:

The image also indicates an uptrend that preceded the Gravestone Doji. This is important contextual information that a trader should take into consideration when putting on a trade.

For example, a more cautious trader would not be in a rush to put on a short position on the close of the Gravestone Doji candlestick. Why? Because the bulls still have the trend in their favour. 

You might be asking, however: "Isn't a Gravestone Doji supposed to be bearish?" Indeed, the bears have definitely applied some pressure on the bulls. But recall from the previous section of this article, that we should not ignore this key point: The Bulls were able to defend the OPEN of the candlestick.

Since the bears were not able to demonstrate their ability to push the price underneath the open, a smart trader would instead wait for confirmation of bear strength. A trade opportunity would trigger toward the downtrend once the next candlestick took out the low of the Gravestone Doji candlestick (as illustrated in the image above).  

Trading A Gravestone Doji in an Uptrend

There are multiple methods that a trader can employ to initiate a trade on a Gravestone Doji in an uptrend. In this section we will discuss three possible methods:

a) Price ticks under the OPEN of the Gravestone Doji in an uptrend
b) Price closes under the low of the Gravestone Doji candlestick in an uptrend
c) Price closes under the low of the Gravestone Doji and offers a "retest" in the direction of the uptrend.

a) Price ticks under the OPEN of the Gravestone DojiI

In this secnario, the trader would look to enter the trade as soon as the next candle ticks under the low of the Gravestone Doji that preceded it. Price ticking under the low of the Gravestone Doji would be enough confirmation to the trader that the Bulls have lost control of the uptrend and the bears were able to push the price further down.

b) Price closes under the OPEN of the Gravestone Doji

This scenario is an extension to the previous scenario where the trader adds a bit more caution to his trade setup.  In this scenario, the trader would wait for the following candle after the Gravestone Doji candle to officially close underneath the open of the Gravestone Doji. This will give the trade more confirmation of the bears applying pressure on the uptrend.

Essentially, he would not enter his trade until the candlestick that followed the Gravestone Doji has fully confirmed its close under the open of the Gravestone candlestick pattern. This is a more cautious and conservative approach where the trader is defending against the possibility of the uptrend continuation.

However,  there is always a trade off. Sometimes, waiting for a candle close underneath the Gravestone Doji may lead to a trade-entry that is further away from the ideal entry that a trade may want. Depending on the traders overall strategy, he may want either he may choose to either enter the trade anyway or wait for price to retrace or "retest" the Gravestone Doji on the next candle.

This leads us to the third scenario:

c)  Price closes under the low of the Gravestone Doji and offers a "retest"

In this scenario, the trader would wait for the following candle after the Gravestone Doji candle to officially close underneath the open of the Gravestone Doji. But if the price closes too far away from the open/close of the Gravestone Doji the trader may decide to wait for price to retrace upwards a bit before taking a short position. This will allow the trader to milk out more profits while still maintaining the same risk parameters.

Trading The Gravestone Doji

A gravestone doji could be found under different market contexts. Such as during bull rallies, market consolidations, as well in market dumps. Regardless of context, the Gravestone Doji remains a bearish candlestick.

The Gravestone Doji is analyzed as such when found under the following context:

1. Bull Rally - It takes conviction from the bulls to sustain a rally. However, a gravestone doji in a bull rally suggests the bears won out. Hence, conviction from the bulls are wearing off. The doji is viewed as a potential reversal candle in this context.

2. Bear Dump - Severe price dumps tend to cause panic selling. Wherein, retailers are looking for the next best opportunity to sell their bags. Hence, when price bounces even slightly, traders sell into it. This price action is likely to render a gravestone doji, and is a sign of continuation.
   
   
3. Market Consolidation - This isn’t always common. However when it occurs, it implies strong bearish market sentiment. The gravestone doji is viewed a sign of bearish sentiment and dominance.