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Of the various charts used for technical analysis of stocks, candlesticks are distinctive for including all four price points essential in decision making.
When the opening and closing prices are not far from each other, the market is indecisive, where both the bulls and bears are not in domination.
To mitigate the risk of trading during such uncertainties, the doji and its reversal patterns are beneficial.
What is the gravestone doji candlestick?
The gravestone doji is a candlestick pattern signalling a potential market trend reversal, with its formation suggesting a shift from an uptrend to a downtrend or vice versa.
A gravestone doji is where the opening, closing and low prices are nearly the same, and the highest price is far from the three.
Spotting the gravestone doji candlestick pattern
The gravestone doji has a thin body due to near-identical opening and closing prices. Its lower wick is minimal, indicating a similar low price.
However, the upper wick is long, indicating that the highest price point is far from the three. The position of the gravestone doji depends on the previous market trend.
In an uptrend, the gravestone doji appears at the chart’s peak, while in a downtrend, it’s at the bottom.
Explicate the gravestone doji candle
In an indecisive market, bulls and bears exert equal pressure.
In the gravestone doji, bulls and bears battle for control, but bears ultimately push prices down to match the opening level.
In an uptrend, as prices approach resistance, bears push them down, forming a gravestone doji at the chart’s peak.
The gravestone doji is rarely formed at the bottom of the chart, meaning it is usually not found in a downtrend market.
Is the gravestone doji bearish?
The gravestone doji is always a bearish indicator. It suggests that the bears are in power, and the prices are expected to fall after they have been in an uptrend for a while.
In a rare scenario, if the gravestone doji is formed at the bottom of the chart (in a downtrend), there may be a possibility of prices falling further.
Trade the gravestone doji candlestick
Understanding how to decide entry, exit, target price and stop loss points is essential for any trader to maximise profits and minimise losses.
Set the highest point of the upper wick as the stop loss in a gravestone doji. Traders going short should wait for subsequent candles to close below the gravestone’s body before opening their positions.
The target price usually depends on the length of the gravestone doji’s upper wick.
Wait for the next candle after the gravestone doji to confirm pattern reversals. As the gravestone doji typically appears in an uptrend, the following candle is anticipated to start a downtrend.
If the candle following the doji isn’t in the expected reversal pattern, the gravestone doji might be a false alarm.
The resemblance between gravestone and dragonfly doji
Both the dragonfly and gravestone doji are candlesticks with very thin bodies, one long and one nearly invisible wick.
They represent similar situations of pattern reversals following a particular trend.
Both the candlesticks appear in a situation of market indecision, trying to hint that the bulls or bears may take over, depending on the previous trend.
While the dragonfly indicates a bullish reversal trend, the gravestone doji suggests a bearish reversal trend.
When either of them appears, the following candle acts as proof to confirm reversal trends.
Limitations
The gravestone doji candlestick pattern, which is generally considered a sign of trend reversal, does not hold good when the doji rarely appears at the bottom of the chart.
Even when the doji appears on the top, it is unreliable unless the reversal is confirmed.
It is sometimes possible that the traders identify the wrong candlesticks as gravestone doji – this happens when the body is small and the lower shadow is very short.
Although it may appear like a gravestone doji, it may not be when observed closely.
Case study
Below is a sample gravestone doji candlestick.
A recent candlestick pattern chart of Cholamandalam Investments shows the formation of a gravestone doji on 5 July 2023.
The market has been in a bullish market/uptrend, before the formation of gravestone doji.
This doji indicates that the prices of Cholamandalam may drop, turning the market bearish.
Bottomline
Though a very commonly used method of technical analysis, candlesticks such as the gravestone doji have limitations.
Since this is not a fool-proof technique, using this approach with other technical tools, like the moving averages and trend lines, is always better for better results.
Nevertheless, this inverted ‘T’ candlestick is considered an essential sign of warning that assists traders in being prepared for future price movements in the market.
FAQs
A Doji candlestick is generally considered a neutral pattern, reflecting indecision in the market. However, its interpretation can be bullish or bearish depending on the context and subsequent price action. It’s crucial for traders to monitor the market closely after a Doji appears.
The Gravestone Doji and Shooting Star are both bearish reversal candlestick patterns, but they differ in their structure. A Gravestone Doji has no body or a very small body near the high of the session with a long upper shadow. In contrast, a Shooting Star has a small body near the low of the session with a long upper shadow. Both patterns suggest a potential bearish reversal following an uptrend.
The Gravestone Doji and Hammer are both candlestick patterns, but they indicate different market sentiments. A Gravestone Doji, with a long upper shadow and no or very small lower shadow, suggests a bearish reversal after an uptrend. Conversely, a Hammer, appearing after a price drop with a long lower shadow and small upper shadow, suggests a probable bullish reversal.
A Dragonfly Doji is a candlestick pattern signalling a potential price reversal. It’s formed when the asset’s high, open, and close prices are the same, indicating buying pressure. A Gravestone Doji is a bearish reversal pattern formed when the open, low, and closing prices are near each other with a long upper shadow, suggesting a bearish advance.
Yes, a Dragonfly Doji is typically interpreted as a bullish reversal candlestick pattern that mainly occurs at the bottom of downtrends. It signals a potential shift in market sentiment from bearish to bullish, especially when it appears after a prolonged downtrend. However, traders typically wait for the confirmation candle before acting on the Dragonfly Doji.
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