How to trade Gravestone Doji Candlesticks with Example: FKnol.com

The gravestone doji candlestick pattern occurs as a bearish reversal pattern on the price charts of stocks, ETFs and stock market indexes. This pattern is formed when the open, low and close prices of a particular security over the period of observation are same or very close to each other. The figure that gets generated on the price charts represents a gravestone - with larger stone at the bottom and tapered one at the top - hence the name. The formation of a gravestone doji candle indicates a potential reversal of the ongoing trend of the prices. For instance, if the gravestone doji is formed when the price has been trending upwards in the recent past prior to formation of the gravestone doji, then there is a strong likelihood that the price may start to move downward after the formation of gravestone doji. The gravestone represents a state of indecision about the future direction of the price movement of the security, which mostly leads to the trend getting reversed. Formation of the gravestone during a downtrend is not that significant, but active traders take it as a sign of indecision where the future market move is uncertain, and they plan their trades accordingly.

This doji candlestick formation is cautiously looked upon by the market players traders who follow technical analysis using price charts and patterns.Either they start watching the market cautiously and cut their existing positions with profit or loss, or wait for next candlestick formation to confirm the next move. Formation of gravestone doji is used to decide the potential moves in the future - like, if already holding a position, then should it be closed at a profit or loss, or should it be held on to.
It primarily acts as a warning signal that a trend reversal may be coming up. For example, the formation of gravestone doji candlestick following a strong upward move in the stock price may indicate that the market is now getting into an undecided state and it is likely that the stock's upward move may come to a halt or may reverse to proceed with a downtrend over the following period.
Traders who act on gravestone dojis may like to wait for the next candle (called confirmation candle) to be formed.

Construction of the Gravestone Doji Candlestick

The gravestone doji candlestick is formed by any standard doji candle which has a very small body and considerably large shadows or wicks on the upper part of the candlestick. As the body is relatively small, it means that the opening and closing prices are the same, or nearly similar. Ideally, the lower shadow or wick should not exist at all, though a small-sized tip is acceptable in a gravestone doji.

The upper shadow (also known as wick of the candle) is considerably long compared to the body of the candle which is formed by the open and close prices. That means the open, low and close prices are very similar to each other, while the high price is proportionately far away from the group of rest three.

It leads to the body of gravestone doji to be located somewhere at the bottom side of the candle which makes it appear like the gravestone - a thick grave at the bottom accompanied by a vertical label stone. Overall, the gravestone doji appears as a long line, where the 'long body' refers to the upper shadow or wick of the candle, while the 'doji' indicates the small size of the candle body formed by the nearly similar open and close prices.

Color of the gravestone doji is irrelevant - that is, it can be green or red because the open and close prices are nearly similar. However, the traders following the confirmation candle method usually watch of the color of the confirmation candle as that trend is expected to continue. If confirmation candle is red (pointing to the downward trend), the downtrend is expected to continue. This is how a typical gravestone doji candlestick appears:

Trading the Gravestone Doji Candlestick

Though the gravestone doji forms rarely on the price charts of all kinds of assets - be it stocks, indexes or exchange-traded funds (ETFs), it signals that a big and important change may be coming. Trading on the formation of the gravestone doji depends upon the context and trend, and trading decision should be taken based on the type of situation that leads to formation of the gravestone doji.

Gravestone dojis gain significance when they are formed during the uptrend. The formation announces a potential reversal after a long downtrend in the stock prices, especially when the lower shadow is considerably long. Gravestone doji means that buyers (bulls) had the full control during the initial phase when the price opened and they took the price up to the highest level during the period of observation. However, the sellers (bears) then managed to outbid the buyers, regained the control and pushed the prices back to the bottom initial level at the closing time. Therefore, the candlestick closed with a long upper wick, and had open, low and close at the same level. This indicates a reversal signal in a continued bullish run.
When gravestone doji is formed, active traders usually wait for one or more next candlesticks to be formed next as confirmation candle(s), so as to confirm if the sellers (bears) still continue to have the control. It can be assessed when a confirmation candle forms a reasonably long bearish body with a red color indicating a downward move. The bearish body indicates that sellers have taken the full control and took the price lower where it closed. Its the time to go short, or sell the stock.

Additionally, traders may also look for the location of gravestone doji formation. They enter the trade only when the gravestone doji is formed at the higher Bollinger band breakout, or at the breakout of the trend-line (like 200-day moving average), or similar other range breakouts. The larger the breakout indicated by the length of the upper wick of the candlestick, the stronger the reversal pattern. If the gravestone doji is formed in the middle Bollinger band or far away from the trend-line (without breaching the trend-line), then the traders may not consider it as a strong reversal signal and they avoid the trade. When formed around the middle band or away from the breakout range, the gravestone doji mostly leads to continuation of the existing trend, but historical instances are insufficient to conclude on that.

Trading Scenario for Gravestone Doji

Here are the general considerations and scenrio for trading the gravestone doji candlestick.

▶ Trade Entry: Formation of gravestone doji during an uptrend is taken as a sign of reversal, that is - the market price is expected to go down in near future. So traders take a short position at or around the high price of the gravestone doji. If formed during a downtrend, then it is not that relevant and is considered as just another doji indicating market indecisiveness.

▶ Stop-loss Limit: The stop-loss varies from trader to trader based on their individual trade preferences, but usually while going short they set the stop-loss at the high price of the gravestone doji (or even a bit higher).

▶ Profit-levels: Traders should follow a risk-reward ratio to determine the possible profit level from their gravestone doji trading. For instance, if the stop-loss limit is set at $1 (the maximum loss one is willing to take on a trade) and the risk-reward ratio one follows is 1/2, then one must take profits when it hits $2. If the risk-reward ratio being followed is 1/3, then one must aim for profits when the price hits a level that generated $3 for every $1 stop-loss set.

▶ Market Conditions: More volatile stocks with high beta values often tend to have high occurrences of gravestone doji formations. Therefore, stock selection gains prominence while taking on gravestone doji-based trading. Along with the above mentioned gravestone doji formation requirement, traders should ensure that their selected price range, bands or trend-line limits are getting breached with large moves of the lower shadow of the gravestone doji candlestick. This ensures higher success rate of profitability. Although one must note that trading on technical analysis like candlestick patterns has limited success rate, so following strict stop-loss, disciplined trading and efficient capital management is advised.

Traders must also note that the gravestone doji is not a frequently occuring candle, and people may often enter into a trade which is not very reliable. It is recommended to wait for the confirmation candle to form. It is also difficult to precisely set the stoploss and profit-levels for gravestone doji, because the length of the upper shadow can vary a lot. While experienced traders can make the best out of these infrequently occurring gravestone doji, the novices should observe it rather than immediately act on it, and start jumping on the trades only when they have gained enough experience and confidence about setting the right target levels.

Example of Gravestone Doji Candlestick

The following chart shows an instance of gravestone doji candlesticks and the uptrend that followed shortly after:

The above chart for Altria stock (MO) on 22-Jan-2020 indicates that the formation of the gravestone doji candle reversed the uptrend that preceded the doji candle, and led to an downward move indicated by the red arrow. The trend reversal was also confirmed by another red doji candles which formed immediately after the formation of the first gravestone doji candle, and was located considerably below the first gravestone candle indicating a confirmation for the up move.
Traders usually set their profit targets and stop-loss levels based on the risk-reward ratio of their choice as mentioned in the previous section.

Latest Gravestone Doji Formations

FKnol.com has a dedicated section on candlesticks where the list of stocks, ETFs and indexes forming gravestone doji candles is updated on a daily basis. At present, the following stocks have formed the gravestone dojis as of the mentioned date (in reverse chronological order):
1) On Tuesday, Jul 28, 2020, the stock price of Energy sector based Marathon Oil Corp. (MRO) formed the following Gravestone Doji Candlestick pattern:

Open	High	Low	Close
$5.54	$5.69	$5.52	$5.53

Body-Length	Candle Length	Body-to-Candle Factor
0.01	0.17	0.06

		$5.69


		$5.54 ~= $5.52 ~= $5.53

See full details and past history of Gravestone Doji Candlesticks for Marathon Oil (MRO)

▶ Full list of stocks which most recently formed the Gravestone Doji Pattern

2) On Friday, Jul 31, 2020, the price of Short Term Volatility based iPath S&P 500 VIX Short-Term Futures ETN (VXX) ETF formed the following Gravestone Doji Candlestick pattern:

Open	High	Low	Close
$28.42	$29.93	$28.38	$28.54

Body-Length	Candle Length	Body-to-Candle Factor
0.12	1.55	0.08

		$29.93


		$28.42 ~= $28.38 ~= $28.54

See full details and past history of Gravestone Doji Candlesticks for iPath S&P 500 VIX Short-Term Futures ETN (VXX)

▶ Full list of ETFs which most recently formed the Gravestone Doji Pattern

3) On Thursday, Jul 30, 2020, the value of popularly tracked leading stock market index VIX CBOE Volatility Index (VIX) formed the following Gravestone Doji Candlestick pattern:

Open	High	Low	Close
$25.04	$28.29	$24.64	$24.76

Body-Length	Candle Length	Body-to-Candle Factor
0.28	3.65	0.08

		$28.29


		$25.04 ~= $24.64 ~= $24.76

See full details and past history of Gravestone Doji Candlesticks for VIX (VIX)

▶ Full list of Market Indexes which most recently formed the Gravestone Doji Pattern

...and there's more. FKnol.com everyday checks the stock price and candlestick formation across hundreds of stocks, ETFs and indexes to look for gravestone doji formations. Please see the full list of recent gravestone doji formations for:
▶ Full list of recent Gravestone Doji Stocks
▶ Full list of recent Gravestone Doji ETFs
▶ Full list of recent Gravestone Doji Indexes

The Bottom Line

Trading candlesticks like the gravestone doji needs strict discipline and emotion-free trading. Candlestick trading is a part of technical analysis and success rate may vary depending upon the type of stock selected and the overall market conditions. Use of proper stop-loss, profit level and capital management is advised.
One can also explore the similar candlestick formations on various dates using the below screener:

Search Gravestone Doji Candles for a particular: