Candlesticks (15 lessons)
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How to Trade Using the Gravestone Doji Reversal Candlestick

The doji candlestick is one of the most common candlestick reversal patterns you will find in the market. The gravestone doji is a variation of this reversal pattern, which we will cover in great detail.

Gravestone Doji is a candlestick bar where the open, low, and close are at the low of the day. The gravestone doji is a bearish formation and its success rate is greatly increased when the candle forms at a market top. The psychology behind the candle is that the bulls pushed the security up to a unsustainable level and the bears are able to sell the security down to its low by the end of the session. The Japanese candlestick literature states that a gravestone doji represents the gravestones of the bulls that have died defending their territory.

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Charting Example of Gravestone Doji

Now that you have an understanding of the setup, let’s review a real-life chart example.

Gravestone Doji Candle

Gravestone Doji Candle

Above is a classic gravestone doji at the end of an uptrend.

By the gravestone doji showing up this late in the uptrend, it was an early sign that the bulls where losing control and a price drop was likely on the horizon.

Once the bears took control, this lead to heavy selling on high volume.

While this first example covers a bearish setup, the basic function of every doji candle is to signal trend reversals –no matter if it is bullish or bearish.


Trading the Gravestone Doji

Now that we have covered the basics, let’s dive into a trading example.

It is important to mention that the risk management rules of the gravestone pattern will vary due to the size of the wick.  Let me not get ahead of myself, we will cover this in more detail shortly.

 

Opening a Gravestone Doji Trade

Whenever you see a gravestone doji appear in the context of a bullish uptrend, this should give you reason to pause as the trend reversal could come at any time!

Once you identify a gravestone doji, you will want to find a trigger that let’s you know when to enter the trade.

A simple trigger is the low of the candlestick.  Once a candle closes below this level, you can open a short position.

Gravestone Doji - Trigger Line

Gravestone Doji - Trigger Line

On the image above, you see a sketch which shows the exact moment when you should short the stock after identifying a gravestone doji. The image starts with a price increase, followed by a bearish reversal gravestone doji.

Then a slight hesitation comes on the next candle, which is relatively small and doesn’t manage to break the trigger line. However, the short signal comes on the second candle after the gravestone doji with a break and close below the trigger line.

Risk Management when Trading the Gravestone

When you trade a gravestone doji, you need to determine where to place your stop loss order.

Like any other setup or trade formation, you always need to protect your capital.

The proper location of a stop loss is above the high of the gravestone doji candlestick.

The one caveat as we mentioned earlier is that for each gravestone doji, your level of risk will vary depending on the length of the candlestick wick.

Gravestone Doji - Stop Loss

Gravestone Doji - Stop Loss

This is the same sketch from above. However, this time we have added the location of the stop loss order.

Pretty straight forward right?

Profit Targets for the Gravestone Doji Pattern

Please remember that without a target for when to exit a trade, you will find it extremely difficult to turn a profit.


For the gravestone doji, we have devised a method for how to set profit targets for when to exit the trade.

Gravestone Doji - Profit Target

Gravestone Doji - Profit Target

Above is the same image, but this time we have included two potential profit targets.

The fist profit target equals the size of the gravestone doji.

The second profit target is double the size of the gravestone doji.  You will need to determine which profit target to use based on the volatility of the chart and the size of the gravestone doji.

Risk Management after Reaching Target 1

When the price reaches the first target, you can either decide to exit the trade, or wait to see if target two is reached.

A simple method for protecting your portfolio if you want to chase the big gains is to move your stop to breakeven after the first target is reached.

Trading with the Gravestone Doji Candlestick Pattern

Now that we summarized all the basic rules required to trade the gravestone doji candle, we will now cover a few real-life trading examples.

Gravestone Doji Trading Example

Gravestone Doji Trading Example

Above is the 2-minute chart of AT&T from Oct 26, 2015. The above image is of bearish gravestone doji pattern.

The chart starts with a price increase, which ends up with a gravestone doji reversal candlestick.  The next candle after the doji breaks the trigger line, therefore we open a short position.

The stop loss should be placed above the high of the gravestone doji to ensure we protect ourselves if the trade goes against us.

For this example, we are going to go with twice the size of the gravestone doji as our profit target.

Eight minutes later, AT&T reaches our initial target. At this point we could exit the trade and book our profits.  The other option is to wait for a further price decrease and exit the trade later.

For me, I always like to exit my trade at my target profit.  Reason being, the stock market moves extremely fast and you do not have the luxury of waiting on a bigger payday.  Also, there is the psychological strain of always wanting more, but never quite getting all of a move.

It’s just too much headache.

As you can see, once you wait for more, AT&T reversed and moved higher only to stop us out of the position.

Let’s now take a look at another trading example of the gravestone doji pattern.

Gravestone Doji Trading Example 2

Gravestone Doji Trading Example 2

This is the 2-minute chart of Visa from April 29, 2016. The image shows another gravestone doji trading example; however, this time the results are more favorable than our first trading example.

The price action is very similar to our last trading example, but in this case the stock does not reverse after hitting our target, but rather continues lower.

Our initial target is located at a distance equal to twice the size of the Doji pattern. This is shown on the image with blue line.

Six minutes later, the price reaches our initial target on the chart; however, we hold the position in hopes of more profits.

In this trading example we were correct and the price breaks down further to make new daily lows. We exit the trade after we see two bullish candles in a row, nearly doubling our profits.

Conclusion

  • The gravestone doji candlestick pattern is a reversal formation, which usually comes after a bullish trend.
  • The psychological factor behind the pattern says that the bulls bring the equity to an unsustainable level, where the bears find less This is why traders say that this pattern symbolizes the gravestone of the bulls.
  • When you see a gravestone doji after a bullish trend, you should short the stock when a candle closes below the tiny body of the gravestone doji.
  • A stop loss should be used for every gravestone doji. This stop loss should be placed above the highest point of the candlestick.
  • You have two options for setting profit targets when trading the gravestone doji:
  • The first one is to seek a price move equal to the size of the formation. I recommend this for longer gravestone doji candles.
  • The second option is to pursue targets equal to twice the size of the gravestone doji. This is a better option when the doji candle is smaller.
  • After your initial target is reached, you could stay in the trade if the stock keeps trending in your favor. If you want to execute this strategy, I recommend you follow these two simple rules:
  • Adjust your stop above the initial target.
  • Stay in the trade until you see two bullish candles in a row. This hints that the bearish move might be over.



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