A gravestone doji is a candlestick pattern that can signal the end of an uptrend.
It occurs when sellers push the daily price back from the session high to the opening price.
Asset price charts can provide informative indications of the future development of prices.
Several patterns are used by traders today, and some of the most common are:
These indicators are limited not only to prices, but also to volume, open interest on assets, and other variables.
They use historical rates and patterns to predict the future, which will help traders get in or out of a trade.
Each of the indicators gives an idea of the trend. Trends are roughly divided into:
- Continuing trend that is expected to maintain the current increase or decrease.
- Reversal, where the current trend is expected to change direction.
Candlestick charts have been used in Japan since the early 18th century, long before the modern stock exchanges were established.
They help in a better visual representation of the data than the simple line graphs.
Candlestick charts are made up of candles with a candle body and a candle wick.
- Wick – is the periodic range of asset prices (vertical line)
- Body – is the difference between the opening and closing price.
If the opening price is higher than the closing price, it means that prices have fallen during the period. For the price to drop, the body is either left hollow or colored red.
Likewise, if the price goes up, the body is solid or green. The color coding makes it easy to identify on long diagrams.
The term tombstone djoi is derived from the shape of the candlestick, which resembles a tombstone. “Doji” is a Japanese word that means “rarity” in this context.
The pattern is a reversal pattern in which the rising price trend is reversed.
At the top of the pattern, the candle looks something like this:
The opening and closing prices are similar or the same.
The price rises significantly in the course of the day and falls back to the opening price at the closing price.
The next day there is a decline in price signaling the bearish reversal pattern.
The opening and closing prices are arbitrary and the color of the candle can be red if the closing price is a little lower.
The pattern is optically like the tombstone seen from the sides and is therefore also called that.
In summary, important points to benefit from a Gravestone Doji:
- Bearish reversal pattern.
- Enter a short position or exit a long position.
The Doji tombstone has a long shadow that indicates a higher intraday price range.
In this way, the market tests price resistance to demand and supply of the given asset.
The pattern forms when the power dynamic between bulls and bears changes. Before the pattern, the bulls are more active and driving the price higher.
After testing the resistance level, bears take control and the price falls.
Bull pressure is driving the stock to levels that the markets cannot sustain.
To restore balance, the bears become more active.
If we look at the USD / JPY pattern, around September 17, 2019, a graveyard doji pattern appears to be forming.
The US dollar gained ground and strengthened against the yen. However, after September 17, the trend changed and the pattern reversed.
You can spot the Graveyard Doji on this date with a long shadow after which prices are falling.
This was an indication of longing the yen and shorting the US dollar.
The resistance of the dollar, which crossed around 108.40 yen, was tested but could not exceed it.
The bears took control and the dollar began to fall afterwards.
A tombstone doji is not easy to find and identify.
This is because the opening and closing prices are rarely the same.
Traders would wait a day or two to confirm the pattern. In our example there was a slight price increase the next day and then the downward trend followed.
While this can reduce risk, you can lose significant profits as prices can drop significantly the very next day.
Another indicator to look out for when using a tombstone doji is the volume traded.
If the traded volume is significantly higher than usual, then the gravestone doji has a greater chance of reversing the trend.
As mentioned earlier, you need to short circuit it.
The exact price point for the short should be when the candle closes near the body.
The trigger target line is the base of the pattern where the candle’s horizontal line formation appears.
This will bring you the greatest profit as this is where the trend reversal occurs.
However, if you have to wait a day or two to confirm the pattern, your profits will go down.
As a trader, you may hesitate to act until you confirm the pattern. What if the price keeps going up?
This is natural and so be on the lookout for other technical indicators like RSI and moving averages.
Like every ttechnical patternn, the tombstone doji isn’t foolproof either. There is a risk that the trend will not reverse and you will face significant losses.
To avoid losses, a Stop loss should be used.
The most suitable price level is at the highest point of the candle.
The highest point is the resistance level.
If the price breaks the resistance the trend will likely continue and the stop loss will limit losses.
The size of the candle, from the base of the candle to the tip of the wick, is the size of the formation.
The profit target should be a price decrease by one (first target) or two times (second target) the size of the formation.
This would be measured from the base of the candle.
What determines the profit target?
When should one have a target with the single size of the formation and when should one have the target with twice the size of the formation?
It is primarily determined by the volatility, the range or the wick of the candle and the traded volume.
All of these factors together give an indication of the extent of the target price.
Again, with experience, it becomes easier to identify the same thing.
You should keep an eye out after the first goal is achieved. When market conditions and volatility patterns are conducive, you can wait for the second target.
Technical indicators can be a lot of information, especially for inexperienced investors. So we’re going to show you a few steps to help you with Gravestone Doji formation.
- It’s a bearish reversal pattern and is usually at the top of the bull run.
- A tombstone doji occurs because the bulls drive the price of the asset to unsustainable levels and the bears take over to reach equilibrium.
- It seems like looking at a tombstone from the side.
- To take advantage of this, you need to short the asset / stock at the bottom of the candle (horizontal line in this case).
- To hedge your position, you need to set a stop loss for each gravestone doji. This should be attached to the top of the candle’s wick.
- There can be two price targets to profit from trading. They can be once or twice the size of the full candle.
- The course objectives would be the size of the tombstone doji if the candle is long. For shorter gravestone dojis, the double candlestick target price should be used.
You may think you’ve identified the pattern as soon as you see something like a tombstone doji forming on the live chart.
However, caution is required. Gravestone dojis can be confused with formations similar to a shooting star.
The Shooting Star would only fall on the opening price of the day or period.
In the heat of the moment, it’s also possible to confuse it with other forms of Doji such as the standard Doji and other types. Here, too, caution is advised.
The sample confirmation should also be supplemented by other technical indicators, in particular the traded volume.
Disclaimer: The information above is for For educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are unfamiliar with exchange-traded options. All readers interested in this strategy should do their own research and seek advice from a licensed financial advisor.