Gravestone doji is a reversal stock trading pattern that can be bearish as well as bullish depending on the position of gravestone doji candlestick. If this candlestick is appeared after an uptrend with strong resistant zone, this pattern would be bearish. On the other hand , if this candlestick appeared after a prolonged downtrend with strong support zone this is bullish candle and pattern is also bullish.
This pattern is based on candlestick. The Candle should have following features:
- Long Shadow: To form this pattern candle must have a long show. Ratio of shadow should be at least twice the body of the candle. Actually higher the ratio of shadow to body of the candle, better the candle formation. Psychology behind the long shadow is that in an uptrend, stock made upward move in the morning. This means uptrend is still intact. But at the end of the day stock failed to hold the morning upward move and stock came back to the opening price of the morning. This indicates bull lost its strength and possible trend reversal signal.
- Open- close: Stock open close should be the same or open close must be very close to each other. In the above chart, stock open is 26.32 and close is 26.33.
- Color of the candle: Candle color could be red or green. It does not matter either. Most important part open close has to be close each other or distance should within pennies.
- Support or resistance line: This pattern works very well if they formed close to or at support and resistance zone. This is a reversal pattern and stock usually reversed at support and resistance zone.
This Chart is for CAH from April 2014 to January 2016. We see stock had very strong resistance label at$ 70. After it broke the resistance label, existing resistance became support label. Stock move down to $70 right in the support zone. At the support zone @$70, Stock had a gravestone doji. This is very strong reversal gravestone doji because of its presence in the long term support zone.
Bearish Gravestone Doji Candlestick Pattern: Trading Setups:
Bearish Gravestone pattern is formed when stock is in uptrend most of the times. Gravestone doji in uptrend associated with resistance level is an indicative of very strong reversal pattern and reliable pattern.
Entry to the Bearish Gravestone Doji Trading Setups:
After a prolong uptrend, stock made bearish gravestone Doji. Entry price is for this pattern is below the low of the Gravestone doji. In the chart entry point is indicated by the blue line. After gravestone doji formed trader enter enter the trade next trading day, when stock break the low of the gravestone doji.
Exit to the Bearish Gravestone Doji Pattern:
Exit is indicated in the chart by yellow line. When stock broke the high of the grave stone doji, the pattern is broken and trader need leave the position as early as possible. The reason for the exit is that as stock break the high of the gravestone doji, it means uptrend is resumed and bear failed to control the downtrend.
Bullish Gravestone Doji Candlestick Pattern: Trading Setups:
Bullish gravestone doji is formed when stock is in the downtrend. Even though bullish gravestone doji is not highly visible pattern, but this pattern is reliable pattern if it formed in the major support level.
Entry to the Bullish Gravestone Doji Trading Setups:
Entry to this pattern occurs as stock made low and formed a gravestone doji at the low of the downtrend. In the above CAH chart, entry is indicated by the blue line. Trader will enter the trade next day after stock exceed the high of the gravestone doji candlestick.
Exit to the Bullish Gravestone Doji Trading Setups:
Trader should exit the trade if pattern is broken. The pattern is broken if stock broke the low of gravestone doji and stock made new lower low. This means downtrend is resumed again and bear is in control of the stock. In the above chart exit is indicated by yellow line.
Gravestone doji is one of the popular day trading strategies among the day trader. As this candle indicate the reversal of the momentum of the movement, day trader can easily take position to the stock.