What is a Gravestone Doji
A gravestone doji is a bearish reversal candlestick pattern that is formed when the open, low, and closing prices are all near each other with a long upper shadow. The long upper shadow suggests that the bullish advance in the beginning of the session was overcome by bears by the end of the session, which often comes just before a longer term bearish downtrend.
BREAKING DOWN Gravestone Doji
A gravestone doji pattern is a popular bearish reversal pattern characterized by open, low, and closing prices that are all near each other and a long upper shadow. While the open, low, and closing prices don't have to be equal for the pattern to be valid, there should be a relatively small tail, else the pattern could be classified as an inverted hammer, shooting star, or a spinning top.
While the candlestick pattern can be found at the end of a downtrend, it's more common to be found at the end of an uptrend. The long upper shadow suggests that bulls had control over the market earlier in the session, but the bears eventually took control by the end of the session. Some studies have shown the chart pattern to be relatively unreliable compared to other candlestick patterns.
Traders will often exit long positions or initiate short positions after identifying a gravestone doji pattern, although it's important to use this candlestick pattern in conjunction with other forms of technical analysis as a confirmation. Often times, traders will also look at the volume associated with the session, as well as the previous sessions' activity, as potential indicators of the reliability of the pattern.
The opposite of a gravestone doji is a bullish dragonfly doji.
Example of a Gravestone Doji
The following chart shows a gravestone doji in Cyanotech Corp.'s stock following a significant high volume uptrend, which could indicate a bearish reversal over the near-term following the breakout.
In this example, the gravestone doji could predict a further breakdown from the current levels to close the gap near the 50- or 200-day moving averages at $4.16 and $4.08, respectively. Traders would also take a look at other technical indicators to confirm a potential breakdown, such as the relative strength index (RSI) or the moving average convergence divergence (MACD). Day traders may also put a stop-loss just above the upper shadow at around $5.10, although intermediate-term traders may place a higher stop-loss to avoid being stopped out.