Hello dear readers. Japanese candlestick formations stand
out when trading in financial markets. These candlesticks reflect all the
events between buyers and sellers on charts. If we can understand the nature of
these candlesticks, we can gain some insight into the future direction of
prices. Within Japanese candlesticks, a part of technical analysis includes
Doji candlesticks. In this article, we have decided to provide information
about one type of Doji candlestick known as the Gravestone Doji.
Topic: Gravestone Doji
Type: Bearish
Trend direction: Reversal
Opposite pattern: Dragonfly Doji
Definition of the Gravestone Doji candlestick
The Gravestone Doji, another member of the Doji candlesticks family, is sometimes also referred to as the Inverted Umbrella. It is a
well-known single candlestick chart pattern in technical analysis and often
signals a price reversal. The Gravestone Doji is a candle formation where the
opening and closing prices of a candle are close or identical, but the upper
wick is much longer than the body. This pattern is a tool used to analyze price
movements, especially in financial markets, and is seen in candlestick charts.
The Gravestone Doji represents a candlestick where the opening and closing
prices are nearly the same during the time period it forms. The gravestone doji
is defined as follows:
- The gravestone doji appears as a candlestick with a long upper shadow. The upper shadow shows the highest price level.
- The lower shadow may be short or have no shadow at all. This means that the lower shadow should be very short or nearly nonexistent.
- The opening and closing prices are very close together or nearly the same, so the body of the candlestick that forms the gravestone doji is very small or often looks like a straight line.
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| Gravestone Doji Candlestick |
This pattern suggests that traders are not sure whether to
buy or sell an asset. The gravestone doji can indicate a period of indecision
or consolidation in the market.
Interpretation of the Gravestone Doji
The Gravestone Doji indicates an imbalance between buying
and selling forces. This situation suggests that the market is in uncertainty
and expresses indecision about which direction the price will move. After the
opening price, the price starts to rise, but bears maintain pressure and bring
the price back to the opening level. The long upper wick of the candle
indicates the strength of bearish pressure. Additionally, the closeness or
similarity of the opening and closing prices may signify an imbalance between
buyers and sellers. The Gravestone Doji often forms at the end of an uptrend,
signaling possible market weakness or the start of a downtrend. If the
Gravestone Doji appears at the end of a downtrend, it may indicate the market
is beginning to stabilize or a new uptrend could be starting.
Note: The Gravestone Doji and Dragonfly Doji are candle
formations that are opposite to each other. The Gravestone Doji is often seen
at the end of an uptrend or near resistance levels, and is interpreted as a
reversal signal. The Dragonfly Doji is often seen at the end of a downtrend or
near support levels, and is interpreted similarly as a reversal signal.
Trading with Gravestone Doji
We can use the gravestone doji candlestick pattern to
identify entry (buy) and exit (sell) points in financial markets. This
candlestick is most commonly known as a bearish candlestick. However, it can
also be interpreted as bullish at times. When trading in financial markets with
the gravestone doji, we follow some guidelines:
SELL (Short) Orders:
If the Gravestone Doji forms at the end of an uptrend or
near an important resistance level, and other technical indicators are also
giving sell signals, it could be a good sign for a selling opportunity. For
this, the Gravestone Doji should appear on a chart where the previous candle is
part of an uptrend. If the price shows a downward movement in the candles
following the Gravestone Doji and this movement takes the closing price below
the Gravestone Doji, it is interpreted as a more definite sell signal. Additionally,
if the Gravestone Doji appears with high trading volume, it can help strengthen
the sell signal. The Stop Loss level is set slightly above the highest point
the price reached (the tip of the wick), just a bit above the resistance level.
You can determine the Take Profit level based on your risk/reward ratio
strategy. For scalping, the Take Profit level is set to the length of the wick
(shadow). The Gravestone Doji candlestick that appeared on the 4-hour chart of
Euro/British Pound below is an excellent example of a reversal in the uptrend:
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| Bearish Reversal Signal with Gravestone Doji on EUR/GBP chart |
BUY (Long) Orders:
If a Gravestone Doji forms at the end of a downtrend or near
an important support level, and other technical indicators are also giving buy
signals, this could be a likely buying opportunity. If the price shows an
upward movement in the candles following the Gravestone Doji, and this movement
carries the closing price above the gravestone doji, this can be interpreted as
a buy signal. Stop Loss level is set slightly below the lowest point the price
reached, just a bit below the support level. You can determine the Take Profit
level based on your risk/reward ratio strategy or use Fibonacci retracement
levels. You can look at the example below on the 4-hour chart of the Australian
Dollar/US Dollar, where the Gravestone Doji signals a reversal at the end of a
downtrend:
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| Gravestone Doji as a Buy Signal on the AUD/USD chart |
In addition to all of this, Gravestone Doji candlesticks can
not only signal trend reversals, but also indicate the continuation of the
trend. If this candlestick appears when there are strong trends in the market,
the trend is likely to continue. It is important to always consider the next
confirmation candle. Now you can see an example of this on the 4-hour chart of
the US Dollar/Canadian Dollar:
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Please keep in mind that the Forex market involves risks.
While it can bring profits, capital loss is also possible. Remember that
sometimes the Gravestone Doji alone may not provide a definite buy or sell
signal. Market conditions, other candle formations, technical indicators, and
fundamental analysis factors should also be considered.