The Gravestone Doji, also known as the Tombstone Doji, gets its name from its appearance, which resembles a gravestone, symbolizing the potential “death” of a bullish trend. However, this candlestick pattern doesn’t always indicate a bearish reversal — it can also suggest a bullish reversal when it appears in a downtrend.
Moreover, the Gravestone candle may sometimes represent a phenomenon known as the 「Doji Trap」, which signals a potential rally ahead. In this article, we will explore the characteristics, implications, and strategic uses of the Gravestone Doji, helping traders better understand this versatile candlestick pattern.
Gravestone Doji Meaning
The Gravestone Doji is a unique variation of the doji candlestick, easily recognizable by its inverted “T” shape. It typically includes the following features:
- The closing price is equal to the opening price.
- Long upper shadow.
- No lower shadow or a very short one.
In practice, candlesticks with a short body, long upper shadow, and a short or absent lower shadow can all be considered as Gravestone Doji. Whether the candlestick closes higher or lower is not significant.
This pattern typically appears at the end of an uptrend, indicating that the buying strength during the session was overpowered by selling pressure, which pushes the price back to the opening level. As a result, it is considered a bearish signal.
While the Tombstone Doji frequently appears on candlestick charts, traders should exercise caution. Shorting the market immediately upon seeing this pattern can lead to frequent losses. To trade effectively using this pattern, it is crucial to consider the candlestick’s position, support and resistance levels, and trading volume. In the following sections, we will explore these factors and their implications for trading strategies.
Gravestone Doji Position
One important factor to consider with the gravestone doji is its position within a trend, as its implications can vary significantly depending on the context – The Market Trend.
1). Tombstone Doji in Uptrend
During an uptrend, a sudden surge in buying pressure drives the market price to a peak. However, before the close, all gains are wiped out, resulting in the formation of a Gravestone Doji. This is often seen as a strong sell signal.
The pattern appearing at the peak of an uptrend typically indicates an exhaustion of buying strength. While bulls managed to create new highs, they were unable to maintain those levels.
Following the formation of the gravestone candle, some bulls may become concerned that the market has peaked, leading them to take profits. These behaviours can further accelerate the subsequent decline and ultimately result in a reversal of the uptrend.
2). Tombstone Doji in Downtrend
On the other hand, when a Gravestone Doji forms at the bottom of a downtrend, it can signal a potential shift in market sentiment. This occurs when bulls make a strong buying push, driving prices up significantly during the session.
However, despite this surge, the bears fight back aggressively, causing the price to retreat and ultimately close near the opening level, erasing earlier gains.
The appearance of a Gravestone Doji in a downtrend highlights a tug-of-war between bullish and bearish forces. With buying pressure starting to emerge and contest the prevailing sell-off, it may suggest that a market reversal is on the horizon.
Compared to a Gravestone candle that forms at the top of an uptrend, the reversal signal of a Gravestone candle at the bottom is relatively weaker. To confirm a potential reversal, it often requires the next candlestick to close as a strong bullish candle.
In many cases, the effectiveness of the reversal signal can also be confirmed by analyzing trading volume, which serves as another crucial factor.
Volume in Gravestone Candle
Once the position of a Gravestone candle is confirmed, for exchange-traded financial instruments such as stocks or futures where volume data is available, volume becomes the next critical factor to assess. Below is an example of the Dow Jones futures daily chart from late 2022, where two high-level Gravestone Doji patterns are highlighted by red box as below:
The Tombstone Doji on the leftside (November 14, 2022) occurred with decreasing volume, followed by several days of high-level consolidation, after which the Dow Jones broke upwards to make new highs.
In contrast, the Tombstone Doji on the right (December 13, 2022) appeared with increasing volume, and the Dow experienced a significant drop afterward. The difference between Tombstone Doji with decreasing versus increasing volume plays a crucial role in their interpretation and application.
1). Volume Decreasing
When a Tombstone Doji forms at the top of a trend, it may indicate emerging selling pressure. However, if trading volume remains low and decreasing, this suggests the selling pressure is not substantial, and the price may continue consolidating at higher levels.
Similarly, when a Tombstone Doji appears at the bottom of a downtrend with low volume, it indicates that few market participants are engaging in buying or diverging from the bearish outlook. This means the price could continue consolidating or even moving lower.
In short, when a Tombstone Doji forms with low volume, the reversal signal is relatively weak. It is advisable to wait for confirmation from the next candlestick before making any trading decisions.
2). Volume Increasing
When a Tombstone Doji forms with heavy or increasing volume, whether in a downtrend or uptrend, it often signals a significant shift in market sentiment, offering a stronger reversal signal than one with decreasing volume.
For instance, if the doji appears at the top of an uptrend with significantly rising volume, it may indicate that large volumes of sellers are entering the market or that buyers are taking profits at higher levels, further increasing selling pressure. This often points to a strong reversal.
In contrast, a Tombstone Doji during a downtrend with heavy volume also suggests a stronger potential reversal. However, it could also reflect intense bearish pressure on emerging buying interest. As such, it is crucial to wait for confirmation from the next candlestick before taking any action.
Gravestone Doji on Support/Resistance
When a Gravestone candle aligns with a key support or resistance level, it can serve as a strong buy or sell signal, even if it doesn’t occur at the top or bottom of a trend and lacks significant volume.
This alignment enhances the significance of the Gravestone candle because the market tends to react strongly at these levels, where buying or selling pressure typically intensifies. Consequently, this makes the Doji pattern more even in the absence of other typical trend factors or heavy trading volume.
Take the example below, in the early stage of the 2022 bear market, Meta Platforms’ stock reversed into a bearish trend and soon entered a consolidation phase. During this time, it formed a clear resistance level near $350. When the stock tested this resistance level, a Gravestone Doji candlestick appeared, which is a sign of strong selling pressure at that critical level. This was followed by a major sell-off, confirming a bearish momentum, as the price was unable to break above the resistance.
The Gravestone Doji Trap
1). What is Doji Trap?
The 「Doji Trap」 occurs when a Doji candlestick pattern gives a false reversal signal, leading traders to believe that a trend reversal is imminent, in fact, the market may continue moving in its current direction.
In the context of a Gravestone Doji Trap, it typically signals a bearish reversal but can mislead traders if the market continues upward instead. However, this failed bearish signal can sometimes be interpreted as a trend continuation opportunity, where traders may go long despite the initial bearish appearance.
In the daily chart of Netflix in 2022, the candlestick on July 18 serves as a classic example of a Gravestone Doji Trap.
The Gravestone candle formed at a key resistance level, as indicated by the red marking. Although its volume wasn’t significantly high, it remained elevated. Many retail traders may have interpreted this doji as a bearish signal, prompting and tricking retail traders to exit their long positions.
However, the next day, the stock opened higher and closed with a strong bullish candlestick on significant volume, resulting in a subsequent price rally and bullish reversal in the broader trend.
2). Identify Doji Trap as Bullish Signal
For experienced traders, the Doji Trap can often serve as a bullish reversal signal, especially when attempting to bottom-pick a stock. Identifying a Gravestone Doji Trap can be challenging, but here are key guidelines for recognizing this pattern and seeking potential long signals:
- Doji Appearance: The Gravestone candle should form at the bottom or middle of a broader trend, indicating possible reversal points in the market.
- Key Resistance Level: It should coincide with a key resistance line, enhancing the significance of the pattern and helping to gauge the strength of selling pressure.
- Volume and Candle Confirmation: After the Gravestone Doji, the next candlestick should close as a bullish candle with heavy volume, validating the potential reversal and indicating strong buying interest.
Failed Gravestone Candle
Regardless of how strong a signal appears to be, it can still turn into a false signal, leading to potential losses for trader. Below, we will illustrate how to handle this situation through a real-world example of a failed Gravestone Doji setup.
The chart shows a segment of AMD stock daily chart, a Gravestone Doji candlestick formed at a high level on 27th Octomber 2021, accompanied by heavy volume. Although this indicated a strong bearish signal, the stock price saw a slight pullback and extending its gain later on.
Such failures are not uncommon, underscoring the importance of using stop-losses to manage risk effectively. A practical stop-loss level for a Tombstone Doji is just above the high of the candle.
While Tombstone Doji patterns occasionally fail, they are still valuable when used correctly. Traders can filter out false signals by considering support and resistance levels, volume analysis, and technical indicators. Moreover, a successful pattern can mark the start of a new trend, with potential rewards far outweighing the risk of hitting a stop-loss.
Gravestone Doji Summary
The Gravestone Doji is essentially a special type of Doji candlestick, where the closing price is at or near the bottom of the candlestick. Unlike a typical Doji that indicates indecision between buyers and sellers, the Gravestone candle has a stronger bearish reversal signal due to its structure. A Gravestone candle appearing at the top of an uptrend typically has a stronger reversal signal compared to one that appears at the bottom of a downtrend. Therefore, the main strategy for this pattern is to look for bearish reversal opportunities at the highs.
In trading the Tombstone Doji, it’s important to not only consider whether it appears at a high or low price area but also to combine it with other technical signals such as support and resistance levels, volume, and technical indicators. When multiple forms of analysis align with the signals from the Tombstone Doji, the reliability of the pattern increases significantly. However, even a strong Gravestone Doji can turn into a false signal, so it’s crucial to set stop-loss orders.
For a short position, the stop-loss should be placed above the high of the candlestick, while for a long position, it should be below the low of the candlestick. This risk management approach helps traders protect their capital amidst market fluctuations.
Gravestone Candle FAQ
1. Gravestone Doji vs Dragonfly Doji
The Dragonfly Doji is essentially an inverted version of the Gravestone Doji. When a Dragonfly Doji appears at the lower end of a downtrend, its reversal signal is typically stronger than when it occurs at the top of an uptrend. This is largely because the Dragonfly Doji represents a significant decline in price followed by a recovery, indicating strong buying support beneath.
Dragonfly Doji on Uptrend
Dragonfly Doji on Downtrend
The Dragonfly Doji is primarily used to identify bullish reversal opportunities within a downtrend. Its application is similar to that of the Gravestone Doji.
2. Does consecutive Gravestone candle on chart means anything?
In a candlestick chart, the consecutive appearance of Gravestone Dojis theoretically increases the likelihood of a market reversal. However, in actual trading, it is essential to analyze factors such as their location, trading volume, and support/resistance levels to make informed decisions.
