Gravestone Doji is a bearish reversal candlestick pattern that occurs at the top of an uptrend. This pattern helps the traders to visually see where the significant resistance level is located on the price chart. The most important aspect of the Gravestone Doji pattern is its long upper shadow. The candlestick’s open, close, and low are all the same in this pattern.
The psychology behind the long upper shadow is this – In an ongoing uptrend, when the price action hits the significant resistance line, buyers exit their positions, and the price action is smacked down by the sellers. In short, the appearance of this pattern represents the losing momentum of the buyers and essentially indicates a bearish reversal in the market.
Most of the traders place their trades as soon as this pattern appears on the price chart. But that’s definitely not the right approach. Instead, we must wait for the next candle to close for the confirmation and only then take the trades. The opposite of the Gravestone Doji is the Dragonfly Doji, which appears at the bottom of a downtrend or the major support area. The below image represents the Gravestone Doji Pattern.
Trading Strategies – Gravestone Doji Pattern
The Gravestone Doji pattern indicates that the buying trend is ending, and the market is reversing to the selling side. However, this doesn’t hold true all the time. We will be finding this pattern quite often in all the types of market conditions, and if we start trading every time we find them, we will end up on the losing side. We always need to ask our self the reason why this pattern appears in certain conditions. Is it going to reverse the market or not?
Pairing the pattern with a significant resistance level
If you find this pattern at the bottom of the range, do not trade it. But if the price action prints this pattern at the top of a range, it can be considered a sign for us to go short. Similarly, find the trending markets and look for a major resistance level where the price could possibly react. So when the price action prints a Gravestone Doji at the major resistance level, it’s a strong sign for us to go short.
In the below USD/CHF Forex chart, we can see that the price action has printed the Gravestone Doji pattern at the significant resistance level. We should be going short as soon as the Doji candle closes.
In the below image, we can see that we took a sell entry when the market printed the Gravestone Doji pattern. We have placed the stop-loss just above the resistance level. It is safer to put the stop-loss above the pattern or at the resistance line because if the price goes above the pattern, the pattern gets invalidated. We know that the Gravestone pattern indicates a market reversal, and most of the time, these reversals travel quite far. That is the reason why we go for deeper Take Profits.
In the above chart, we can see that we had exited our full positions when strong buyers showed up. This indicates that the sellers are losing their momentum, and there is no logic to continue holding our positions.
Gravestone Doji + Stochastic Oscillator
The strategy that we shared above is for aggressive traders who like to take risks. However, if you are A type of trader who needs more confirmation to pull the trigger, we suggest you follow this strategy to trade this pattern. Most of the conservative traders do have a fear in their minds that one single candle does not have the potential to reverse the market. And it is completely okay to think like that. The truth is that sometimes even a single candle can move the market, and sometimes it doesn’t. Ultimately it is your money management system that makes all the difference.
But to filter out some poor signals and to get an additional confirmation, it is advisable to use the Stochastic oscillator to confirm the probability of our trading signal. Stochastic is a range-bound indicator that oscillates between the 0 & 100 levels. When the Stochastic goes above the 70 level, it means that the market is in an overbought condition, and we can expect a change in the trend. Likewise, when it goes below the 30 levels, it means that the market is oversold are we can expect a reversal anytime soon.
The Stochastic indicator also shows the bearish and bullish divergence, which helps the traders in trading the upcoming reversals. The divergence is when the market moves in one direction, but the indicator is signaling a different direction. Now we believe that you understand the basics of trading with the Stochastic indicator. Now let’s dive into the strategy.
The strategy here we are using is simple and straight forward. First of all, identify the Gravestone Doji pattern at a significant resistance level in an uptrend. Then, apply the Stochastic indicator to the price chart and check if the indicator is at the overbought area, indicating a downside reversal. If yes, go short and place the Stop-Loss just above the pattern.
The GBP/CAD chart below indicates the appearance of the Gravestone Doji pattern in an uptrend. When the price is approaching the upper resistance level, it got smacked down immediately, and the market ended up printing the pattern. The next six candles tried very hard to break the pattern & resistance line, but nothing worked, and the price ended up rolling down. We can also observe the Stochastic indicator was at the overbought area, which is a confirmation sign for us to go short.
We have entered for a sell when both the conditions are met, and placed the Stop-Loss just above the pattern. For the Take-Profit, we choose to go for deeper targets. When the selling trend started to struggle, the Stochastic indicator was at the oversold selling conditions. At that point, we have closed our full positions for obvious reasons.
The trades taken based on the Gravestone Doji pattern are pretty reliable. But do not make the mistake of identifying the pattern everywhere on the price chart. The psychology behind this pattern says that the bulls drove the price to a peak point, and the sellers are comfortable in reversing the market. For booking profits, you can expect an equal move to that of a previous trend. If you are an intraday trader, make sure to exit your positions at any significant level. Although this pattern appears on all the timeframes, the reliability is higher on higher timeframes to that of lower timeframes.
We hope you find this article informative. Try trading this pattern on a demo account and master it before applying the above-mentioned strategies on the live market. Cheers.