The gravestone doji is a bearish reversal candlestick pattern that mostly appears at the top of uptrends. It forms when the open, low, and close are the same or about the same price. This formation has a long upper tail but no lower tail, thus it shows an upside-down capital letter T.
How to trade the gravestone doji?
As it is expected to be a reversal pattern, you can enter short after the pattern appears. The probability of a successful reversal is higher if there is a confirmation candle after the gravestone doji. This candle should close lower than the close of the gravestone doji. If your risk tolerance is lower, you can enter short after this second candle. As you are supposed to place your stop a few pips above the gravestone candle, if entering after a confirmation candle, your stop will be farther away from your entry. This means your risk/reward ratio is likely worse. It is a fair tradeoff for the higher probability.
As it is a reversal candle, you would expect that the uptrend is soon over. This means that it makes sense to look for signs that confirm the coming refersal. These signs can be:
- other bearish reversal patterns preceding the gravestone doji
- resistance near the top of the gravestone doji, such as previous significant highs or lows, significant moving averages (e.g. 20, 50, 100 EMA, etc) or Fibonacci levels
- divergence between price and the most important indicators, such as the MACD, the RSI or the Stochastic oscillator (i.e. price produces higher highs, while the indicator shows lower highs)
As we are talking about a bearish reversal pattern, you can trade it in a downtrend in case there is a retracement. Similar to the above, you can look for the following to reinforce your trade: other reversal candles, resistance, divergence.
One of the most powerful setups for the pattern is when it appears near strong resistance in a retracement in an established downtrend.
The pattern is relatively weak if it appears before a significant support. It is better not to trade it or to wait until the support is powerfully penetrated.
Entering a trade near resistance is usually a good idea. The only thing you need to make sure is not to place your stop below the resistance even if the top of the pattern is below it.
How reliable is the gravestone doji pattern?
In itself the candle is not very reliable. Our performance rank for the gravestone doji is 4/4, which means its in the lowest quartile among patterns. This is very typical for standalone candles. This candle pattern can however still be traded well, but you have to consider other factors, as recommended above.
Gravestone doji for stocks
The gravestone doji can be traded well for stocks, with one important notice. If the timeframe is intraday or there is low liquidity in the stock, this candle can present far too many false signals.
Gravestone doji for forex
It can be traded well for forex. You may want to avoid however very short timeframes, such as 1-5 minutes and look for confirmations wherever you can.
Gravestone doji for Bitcoin
On a daily level it is a relatively stable pattern for Bitcoin. Although it appears quite rarely, but there have been a couple of historic examples which signaled reversals well.
This pattern is also known as the ‘inverted umbrella’. The bullish pair of the candle is the dragonfly doji, which is also colled the ‘umbrella’.