Gravestone Doji: Definition, How to Trade It, and Example

What Is a Gravestone Doji?

The term gravestone doji refers to a bearish indicator commonly used in trading by technical analysts. 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 at the beginning of the session was overcome by bears by the end of the session. This often comes just before a longer-term bearish downtrend.

What Does a Gravestone Doji Tell You?

As noted above, a gravestone doji is used in technical analysis. It is a strategy that some investors use to make trades. They rely on statistical trends, such as past performance, price history, and trading volume to make their trading decisions. They often employ charts and other tools to identify opportunities in the market. One of these is the gravestone doji.

The gravestone doji pattern implies that a bearish reversal is coming. It looks like an inverted T with a high, upper shadow. The open, low, and closing prices can be equal or almost equal for the pattern to be valid. There should also be a relatively small tail or else the pattern could be classified as an inverted hammer, shooting star, or a spinning top.

The market narrative is that the bulls attempt to push to new highs over the session but the bears push the price action to near the open by the session close. So the long upper shadow represents the bulls losing momentum.

While the gravestone doji can be found at the end of a downtrend, it is more common to be found at the end of an uptrend. Although the gravestone doji is popular, it suffers from the same reliability issues as many visual patterns. Traders will generally not act on a gravestone doji unless the next candle provides confirmation of a reversal.

Trading the Gravestone Doji

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.

Investors often look at the volume associated with the session, as well as activity from the previous session, as potential indicators of the reliability of the pattern. The following chart shows a gravestone doji in Cyanotech's stock following a significantly 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.

Gravestone Doji vs. Dragonfly Doji

The opposite pattern of a gravestone doji is a bullish dragonfly doji. The dragonfly doji, which isn't a very frequent pattern, looks like a "T" and it is formed when the high, open, and close of the session are all equal or nearly the same. Unlike the gravestone doji, the dragonfly doji pattern has a long lower shadow. This implies aggressive selling during the period of the candle.

Although these two formations are talked about as separate entities, they are essentially the same phenomenon. When confirmed, one can be called bullish and the other bearish. Sometimes they can appear in the opposite scenario.

For example, a gravestone doji can be followed by an uptrend or a bullish dragonfly may appear before a downtrend. Both patterns need volume and the following candle for confirmation. It is perhaps more useful to think of both patterns as visual representations of uncertainty rather than pure bearish or bullish signals.

Limitations of a Gravestone Doji

The gravestone doji can be used to suggest a stop loss placement and eyeball a profit-taking plan on a downtrend, but these are less precise methods than other technical indicators provide. Although reliability increases with volume and a confirming candle, the gravestone doji is best accompanied by other technical tools to guide trading.

The Bottom Line

Many traders use technical analysis to capitalize on trends in the market. They use charts, patterns, and other tools that are based on past performance, trading volumes, and price history. One of these tools is the gravestone doji. This inverted T appears in a group of candles on a chart and is a bearish pattern indicating that a reversal is on the horizon with a downtrend in the price action. Knowing the ins and outs of the gravestone doji, when to use it, and combining it with other technical tools can help you minimize your losses while you profit on your trades.