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Gravestone Doji Candlestick Pattern (Backtest)

Candlestick charts are instrumental in identifying minor fluctuations in prices and trends, which frequently result in patterns that signal potential trading opportunities. Among the various candlestick patterns, the Gravestone Doji is considered a highly reliable indicator. Are you interested in learning more about the Gravestone Doji candlestick pattern trading strategy?

The Gravestone Doji is a bearish reversal candlestick pattern characterized by a long upper shadow, a small or nonexistent body, and a minimal or nonexistent lower shadow. It occurs when the opening, low, and closing prices are all situated close to one another. The lengthy upper shadow indicates that the bullish momentum seen at the start of the session was overtaken by bearish forces by the end of the session.

Four Price Doji pattern backtest

In this post, we take a look at the Gravestone Doji candlestick pattern trading strategy.

Understanding the Gravestone Doji Candlestick Pattern

The Gravestone Doji is a bearish reversal candlestick pattern characterized by a long upper shadow, a small or nonexistent body, and a minimal or nonexistent lower shadow. It occurs when the opening, low, and closing prices are all situated close to one another, creating a distinct inverted “T” shape. The lengthy upper shadow indicates that the bullish momentum seen at the start of the session was overtaken by bearish forces by the end of the session.

The pattern is widely used by traders to identify the beginning of a potential downward trend in the market. It is formed when the opening, low, and closing prices of an asset are all close to each other, resulting in a small or nonexistent real body and a long upper shadow. The pattern is usually seen at the top of an uptrend, and its appearance suggests that sellers are starting to take control and push prices lower. It is considered one of the most reliable bearish reversal patterns, and traders often use it to confirm downtrends or to enter short positions.

However, it is important to keep in mind that the Gravestone Doji is not a guarantee of a trend reversal and should be used in conjunction with other technical analysis tools and indicators to make informed trading decisions. Also, traders should consider the overall market context and analyze other relevant economic data before making a trade based on this pattern.

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Identifying the Gravestone Doji in Trading Charts

Identifying the Gravestone Doji candlestick pattern in trading charts is a crucial skill for traders who use price action analysis as part of their trading strategy. The Gravestone Doji is a single candlestick pattern that is formed when the opening, low, and closing prices of an asset are all close to each other, resulting in a small or nonexistent real body and a long upper shadow.

To identify the Gravestone Doji, you should look for the following key characteristics:

  1. Small or nonexistent real body: The real body, which represents the difference between the opening and closing prices, should be small or nonexistent.
  2. Long upper shadow: The upper shadow, which represents the highest price reached during the trading session, should be significantly longer than the real body. It should be about 2-5 times the size of the real body.
  3. Little or no lower shadow: The lower shadow, which represents the lowest price reached during the trading session, should be small or nonexistent.
  4. Appearance at the top of an uptrend: The Gravestone Doji is most commonly seen at the top of an uptrend, signaling a potential trend reversal.
Identifying the Gravestone Doji
Gravestone Doji candlestick pattern
Gravestone Doji pattern backtest

It’s important to note that the Gravestone Doji is not a guarantee of a trend reversal. Traders should also consider the overall market context and analyze other relevant market and economic data before making a trade based on this pattern.

Overall, the Gravestone Doji is easy to identify in trading charts. You only need to pay attention to the pattern’s key characteristics, as enumerated here.

Significance of the Gravestone Doji in Trading

The Gravestone Doji is a significant candlestick pattern in technical analysis and trading. It is considered a bearish reversal pattern when it forms at the top of an uptrend, where it can signal a potential trend reversal. Traders use the Gravestone Doji to confirm that the bullish momentum has been overcome by bearish forces. The long upper shadow indicates that the bulls were initially in control before the bears took control and pushed the price down to where it opened at.

Some price action traders use the Gravestone Doji pattern as a signal to enter short positions in the hope of capitalizing on the emerging downward trend, especially when the pattern forms at a key resistance level after a rally in a downtrend. In that case, the long upper shadow of the Gravestone Doji provides them with a key level to determine their stop-loss levels, helping them manage their risk.

Experienced technical traders incorporate the Gravestone Doji into a comprehensive trading strategy that takes into account multiple technical and fundamental factors. Since the appearance of a Gravestone Doji is not a guarantee of a trend reversal, it should not be relied upon as the sole basis for making trading decisions.

It is very important to always consider the overall market context and other relevant economic data before making a trade based on this pattern. When used in conjunction with other technical analysis tools and indicators, such as the RSI, the Gravestone Doji can improve a trader’s risk management and inform more informed trading decisions.

How to Trade the Gravestone Doji Candlestick Pattern

The Gravestone Doji pattern is often considered a bearish reversal pattern, especially if it occurs in an uptrend or a rally in a downtrend. So, it can be used to identify short-selling opportunities in the market. But the pattern should not be used as a lone signal. You should make it a part of a robust trading strategy where the pattern can help show bearish reversal signals. For a simple price action strategy that uses a trendline, resistance levels, and the Gravestone Doji pattern, here are the steps to trade it:

  • Identify a downtrend: Use a down-sloping trendline to delineate the direction of the trend. There should be a downtrend, with the price trading below the trendline.
  • Mark the resistance levels above the price: Use a horizontal line to mark the potential resistance levels.
  • Wait for the price to rally to a resistance level: Wait for the price to pull back (rally) to a resistance level or the trendline.
  • Identify the pattern: Look for the Gravestone Doji pattern around the resistance level.
  • Place a sell order: After confirming the Gravestone Doji pattern around a resistance level, place a sell order at the opening price of the next candle.
  • Set a stop loss: To manage risk, set a stop loss order above the high of the Gravestone Doji pattern.
  • Set a profit target: Establish a profit target before the next support level.
  • Monitor your trade: Regularly monitor the market to see if the price starts to decline again toward the profit target, or if the stop loss is triggered.

You can automate this process with trading algorithms if you know how to code, or you can hire a programmer to do it.

Strategies for Maximizing Profits with the Gravestone Doji

You can maximize profits with the Gravestone Doji by implementing the following strategies:

  • Shorting rallies in a downtrend: The Gravestone Doji pattern has better odds of downward reversals when it forms at the end of a rally in a downtrend. In this case, you are trading in line with an existing downtrend.
  • Trading only patterns that form at key resistance levels: Trade only patterns that form at key resistance levels which the price is unlikely to break. This way, the chances of a reversal are higher.
  • Considering market conditions: You should consider the overall market conditions and the economic context before making a trade based on the Gravestone Doji. Factors such as market volatility, economic data releases, and political events can impact market trends and should be considered when making a trade.
  • Confirming with other indicators: To confirm a potential downward reversal signaled by the Gravestone Doji, you can use momentum indicators like the RSI. The RSI descending from an overbought region when the Gravestone Doji forms helps to confirm the emerging downward reversal.
  • Implementing proper risk management: Proper risk management is key to maximizing profits and minimizing losses. You should determine their stop-loss levels based on key levels such as the Gravestone Doji’s long upper shadow. Also, size your positions appropriately (1-2% per trade) to ensure that your potential losses are in line with their risk tolerance.

Timing Entry and Exit Points with the Gravestone Doji

Timing entry and exit points with the Gravestone Doji requires a combination of technical analysis and market awareness. While the Gravestone Doji pattern at a key resistance level in a downtrend is enough signal for a price action trader, you should wait for confirmation of a trend reversal. You can get the confirmation by looking for bearish signals from other technical indicators such as moving averages, trend lines, and momentum indicators.

To determine entry and exit points, you should monitor key levels such as support and resistance levels and the level of the Gravestone Doji’s long upper shadow. The best entry presents when the pattern forms after a rally in a downtrend. In that case, you are combining the bearish reversal signal with an existing downtrend. If the pattern forms around a resistance level, the signal becomes even stronger.

For the exit points, you may consider using stop-loss orders or take-profit orders. Stop-loss orders are used to limit potential losses, while take-profit orders are used to lock in profits. Set the stop loss above the high of the Gravestone Doji pattern and set the profit target at the next support level. You may also consider using a trailing stop-loss order, which adjusts the stop-loss price as the market moves in your favor. It may also be possible to use the opposite signal as an exit method. For example, you can exit when a bullish reversal candlestick pattern forms at a support level.

Market conditions and relevant economic data releases should also be considered when timing entry and exit points, as the market’s reaction to these events can impact trends and price action.

Combining the Gravestone Doji with Other Technical Indicators

Combining the Gravestone Doji with other technical indicators can provide traders with a more comprehensive understanding of market trends and help confirm potential reversal signals. One way to do this is to use moving averages to identify trends and potential trend reversals. For example, a long-period moving average can show an ongoing downtrend and serve as a descending resistance level. When a Gravestone Doji forms after a rally to the moving average, it could be a strong signal to enter short.

Another useful tool is trendlines, which can be used to identify key levels of support and resistance and to confirm trend reversals. When the price action stays below a downtrend line and a Gravestone Doji forms after a rally to the trendline, it can indicate a good shorting opportunity.

Momentum indicators, such as the RSI and stochastic, can help traders identify overbought and oversold conditions and potential trend reversals. When a Gravestone Doji forms during overbought conditions, this can indicate a potential downward reversal.

Volume analysis is another tool that traders can use to confirm trend reversals by providing insight into the strength of market trends. When a Gravestone Doji forms in combination with an increase in trading volume, it may indicate an increasing downward momentum and provide shorting signals.

By and large, combining the Gravestone Doji with other technical indicators can provide traders with a more comprehensive view of market trends and help confirm potential reversal signals. By using a combination of moving averages, trend lines, momentum indicators, and volume analysis, traders can make more informed trading decisions.

Key Factors to Consider When Trading the Gravestone Doji

While trading the Gravestone Doji can be straightforward, there are a number of key factors to consider. These are some of them:

  • Market context: Understanding the overall market context is important when trading the Gravestone Doji. It is important to consider the trend of the market, as well as any major economic or political events that may be affecting the market.
  • How to confirm the signal: The Gravestone Doji is considered a bearish reversal pattern, but it is important to look for confirmation from other technical indicators before making a trade. Moving averages, momentum indicators, and volume analysis can all provide valuable information about the strength of the trend and the potential for a bearish reversal.
  • What the trading volume says: Trading volume can provide valuable information about the strength of a trend and the potential for a trend reversal. When a Gravestone Doji forms in combination with an increase in trading volume, it can indicate a potential trend reversal and provide traders with a potential trading opportunity.
  • Whether to use a stop-loss order: A stop-loss order can be used to limit potential losses. It is important to set a stop-loss when trading the Gravestone Doji, as this can help to minimize potential losses and protect capital if the price moves in the opposite direction.
  • Position sizing: Risk management is an important part of any trading strategy, and one important aspect of it is position sizing. It is important to combine the use of stop-loss orders and position sizing to manage risk.
  • Diversification: It may be necessary to diversify across different markets and timeframes to spread out risks.

Common Mistakes to Avoid When Trading the Gravestone Doji

It is important to avoid mistakes when trading so as to increase the chances of success. Here are some of the common mistakes to avoid when trading the Gravestone Doji:

  • Overreliance on the Gravestone Doji: The Gravestone Doji is just one of many technical indicators that traders can use to make decisions about the market. Overreliance on the Gravestone Doji as the sole indicator of a trend reversal can lead to poor trading decisions. It is important to consider other indicators and market context before making a trade.
  • Ignoring market context: Studying the overall market context is important when trading the Gravestone Doji. Ignoring major economic or political events that may be affecting the market can lead to poor trading outcomes.
  • Lack of confirmation: The Gravestone Doji is considered a bearish reversal pattern, but it is important to look for confirmation from other technical indicators before making a trade. A lack of confirmation from other indicators can increase the risk of a false signal.
  • Not setting stop-loss orders: This can increase the risk of substantial losses, as stop-loss orders help to limit losses and prevent catastrophic losses.
  • Poor risk management: Poor risk management, such as overtrading or not considering position sizing, can increase the risk of substantial losses.

Real-Life Examples of Profitable Gravestone Doji Trades

The Gravestone Doji candlestick pattern is pretty common on price charts. Here is an example trade on the Cyanotech Corporations stock chart.

In the chart above, you can see the Gravestone Doji candlestick pattern that formed after the price rallied to a resistance level (indicated by the golden horizontal line). Notice that the price has been in a downtrend before the rally. The price spiked above the resistance level but was rejected with the formation of the Gravestone Doji pattern. A sell order placed at the beginning of the next candlestick would be in profit by now. This is an ongoing trade setup. Notice the position of the stop loss and profit target.


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