The D0ji is an important kind of candlestick pattern, but easily the most infamous kind of Doji is referred to as the Gravestone Doji. By definition this type of candlestick pattern is formed when the opening and closing price trends for underlying assets are essentially equal, but also occur at the daily low end.
Gravestone is a metaphor that refers to a type of Doji that has no lower wick and a long upper wick, so it’s shape appears like a gravestone from the side.
This is infers that buyers initially stepped in but were overpowered by sellers and the candle closed on the opening price of the candle which is also the low as you can see in the chart above.
If the opening and closing prices of this candlestick are equal, it will not have a body. But if the opening and closing prices are not equal, it will have a small bearish or bullish body. In most cases, it will also have a smaller low shadow or none at all.
Directions of Supply and Demand
A long upper wick gives forth a suggestion that buying pressure is being countered by selling. Essentially forcing the daily directions of supply and demand into a state of near balance.
This candlestick investing pattern is commonly interpreted to suggest that trend directions are approaching a major turning point.
A Gravestone Doji at the top of a bullish trend which has a long upper wick, foreshadows a reversal of supply and demand trends. This would suggest the bulls have already started taking profits and shorts are stepping in to counter the trend, therefore the prices will not likely go any higher, at least for the time being.
Gravestone Doji is a Reversal Signal
This candlestick pattern is used by traders, because it is a common and clear sign of a trend about to reverse. It is something that typically happens at the end of an upward trend, so traders know it may be time to close their position.
Next time you see this candle make sure you understand that it is a counter trend candle so if you are long the stock , maybe look to tighten your stop or trim some of your position and if you don’t have any position then it may be a good opportunity to take a short position with a stop above the high of the Gravestone Doji candle.