How to Identify a Gravestone Doji
With the price closing at the open, a doji candlestick often indicates indecision in the market.
But if a doji appears in a prominent uptrend, it might be a sign that the price action is about to reverse.
This week we’ll walk you through a bearish reversal candlestick pattern: the gravestone doji.
What is a gravestone doji?
A gravestone doji is a single candlestick pattern with the open, low, and close prices being virtually the same, while intraday trading moves far above the open at one time.
Thus, it looks like an inverted letter T without a clear lower shadow, but only a long upper shadow.
The pattern is typically formed after an uptrend and signals a potential reversal of the price action.
How does a gravestone doji occur?
While a gravestone doji can appear in a choppy market or a downtrend, it typically forms after an uptrend when buying pressure subsides with sellers stepping in.
On the day the pattern is formed, the price generally opens above the previous closing price and advances strongly as the session progresses. The strong upward move indicates a continuation of the bullish market sentiment.
However, a reverse in price action occurs as selling pressure increases. Despite the magnitude of the initial bullish effort, the market eventually closes at or very close to the opening price, forming a gravestone doji with a long upper shadow.
A gravestone doji suggests the bulls are losing control of the market, and the bears might take over later.
If the next candlestick closes below the pattern, the bearish signal might be confirmed, indicating a potential downward price movement.
How to identify a gravestone doji?
To potentially identify a gravestone doji, traders might consider the following characteristics.
● Uptrend
A gravestone doji typically forms after an uptrend. If the pattern occurs in a downtrend or a choppy market, the bearish signal might not be that significant.
● Doji
A gravestone doji is a particular type of doji candlestick without a visible body.
● Long upper shadow
The pattern’s upper shadow should be long, indicating the price has moved strongly upward but the bulls are not able to hold their ground by the end of the session.
● Confirmation
To potentially confirm the bearish signal, traders might look for the next candlestick closing below the gravestone doji.
Case study
The chart below shows a gravestone doji of United Airlines Holdings, Inc. (NASDAQ: UAL) formed in 2016.
The stock was in an uptrend starting in January 2016.
A gravestone doji was formed on March 31 as the stock opened slightly above the previous closing price at US$59.92.
As the session progressed, bullish sentiment continued, pushing up the price to an intraday high of US$61.39.
After that, the bears stepped in and showed their strength, pushing the price down near the opening price.
On the next day, the price dropped significantly, helping to confirm the potential bearish trading bias.
Summary
The gravestone doji is considered a bearish reversal candlestick pattern which typically forms after an uptrend.
The pattern might help traders with long positions determine a potential exit point or signal a potential entry point to short sellers.
When trading candlestick patterns, it is important to factor in other technical methods.
This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. Read more