Gravestone Doji – – Tradingsim

Candlestick patterns can have some crazy names sometimes. Stars, dojis, and abandoned babies? The Japanese were fond of naming candlestick patterns after real-life visual representations. Shooting stars, morning stars, evening stars and abandoned babies are all examples of indecision reversal candle patterns. We’ll introduce you to them in this post.

If you haven’t checked out our complete explanation of candlestick patterns, be sure to do so. In it, we cover the construction of a candlestick chart, the history of candlesticks, and common candlestick reversal patterns. It also has a link to a free cheat sheet that includes the stars, dojis, and baby patterns.

What are Candlestick Stars?

As noted above, stars are a type of indecision candle. Typically we want to trade them as a powerful reversal pattern. But as with all candlestick patterns, context is everything.

Types of Candlestick Stars

The key rule to a star is that its real body does not overlap the previous candles real body. There are several variations of the star pattern:

morning star
evening star
doji star
shooting star

The Body

Stars will typically have a small body. This is particularly important for psychological reasons which we’ll get into in a moment. But for now, suffice it to say that stars usually open and close very tightly.

Of course, these candles can appear anywhere on a chart. With the examples below, we’ll teach you the proper context where they should appear for profitable reversal patterns.

Exhaustion Gaps

On a daily chart, the Candlestick Stars will typically appear with a gap at the highs of an extended run, or the lows of an extended sell off. This is the key to the reversal patterns

Candlestick Stars will typically be associated with increased volume at these climactic ends as well. This also is part of the psychology of the pattern.

Psychology of the Candlestick Star Pattern

As a star has a small real body, it represents indecision by bulls and bears.

How so?

Think about it this way:

When a stock is trending upward aggressively, strong hands and institutions will be selling into that strength. Meanwhile, retail traders may be buying here unaware that the stock is about to turn.

Likewise, because the stock is so extended, short sellers will be initiating their positions as well, adding more supply to the stock.

As all of this occurs at once, we get a star candle that can’t seem to make up its mind on moving higher or lower. A lot of activity, but not much movement in either direction. That is, until the next candle.

While the primary trend is still intact, the presence of the star is the first sign that the trend could turn. Think of it like a crossroads.

It is the second candle that will tell us whether the reversal pattern is confirmed or not.

Candlestick Star Variations

Morning Star

The morning star candle is a bottom reversal signal that comes after an extended downtrend.

This pattern is a three candle reversal setup. The first two bars are the typical star setup discussed above. The major difference with this pattern is the third candle in the formation.

It is a very strong green candle, which does not have to be a gap and closes at least halfway into the first candle.

Assessing the Strength of the Morning Star Signal

The further the green reversal candle closes into the first bar (the red bar preceding the star), the more bullish the formation.

On that note, outside of the morning star candlestick pattern revealing itself, look for other indications that this pattern is confirming. For example, you want to see high volume in the third candle, indicating strength.

Additionally, the morning star works very well when it occurs at previous support levels. The more criteria you can find, the better.

On the other side of the coin, if you buy a stock that prints the morning star, be prepared for some sort of pullback.

It is not uncommon for that to happen nearly 50% of the time. If there is a violation of the lows, then the morning star is failed.

Let’s take a look at the morning star candlestick at work with a live trading example.

Morning Star Trading Example

This is a beautiful morning star setup.

First of all, the morning star came in at previous support near the 60.37 level. The star candle came in the form of a hammer.

Refer back to our Candlestick Guide to learn more about the hammer.

There was high volume that came along with the hammer, and this was an even bigger sign that this level would hold as support. The following day, the stock accelerated with a gap higher and closed well into the top half of the first bar.

As mentioned earlier, the presence of this pattern does not indicate an immediate rally. As you can see, the gap created from the second to the third bar was backfilled.

Smaller gaps, such as this one, tend to fill in the short term. Even if one had waited for the high of the third candle in morning star to be broken above, five points could have been made in that short amount of time.

Evening Star

The evening star candlestick is the bearish version of the morning star.

It is a top reversal pattern that occurs after a sustained uptrend. The evening star is also a three candle pattern.

Evening Star Formation

The first candle is a strong bullish candle. The second candle is the star, and the third is a red body that closes well into the first candle.

Again, as with the bullish morning star, the third candle in the evening star does not have to be a gap.

Here are a couple of factors that increase the chances of this pattern succeeding:

The real bodies of all three candles do not overlap
The third candle closes well into the first one; preferably regaining 75% of the candle
Volume should lighten up on the first candle and increase on the third.

Just as the lows of the morning star pattern provide support, the highs of the evening star candle formation serve as resistance to any further upside movement.

Doji Stars

A candlestick doji pattern is a candle that lacks a real body. This means the open and close of the bar are essentially the same. It has a strong significance after substantial advances or declines.

The lack of direction is a potent reversal signal, especially if it is followed by a candle in the anticipated direction, and at the end of a trend.

When a doji is the star within the morning star and evening star candlestick patterns, the formations are known as the morning doji star and evening doji stars.

Notice, the Evening Doji star image above is an abandoned baby top, while the morning doji star is not. We’ll explain why below.

Abandoned Baby Candle

Another extremely powerful version of the doji star is the abandon baby top or abandon baby bottom. This pattern is the equivalent to what some know as the island reversal.

The abandoned baby candlestick has a doji as the second candle with a gap on both sides.

If you think about the psychology of this setup, the first gap came in an exhaustive fashion.

The stock was already in a strong uptrend or downtrend, and then it made a gap which closed near its open. This was the first sign that the directional pressure was fading.

Now, with the third candle gapping in the opposite direction of the trend, we have confirmation that a more significant trend reversal has taken place.

The Shooting Star

Shooting Star Candlestick Pattern — Shooting Star

The final star variation we will discuss is the shooting star, which occurs after a strong uptrend (or the inverted hammer that occurs after a strong move down).

The shooting star has a long upper shadow with a small real body at the lower end of the candle. This pattern usually presents itself as a sign of a short term correction rather than a more potent reversal signal.

Along those lines, it is telling us that the market’s rally could not be sustained. The market opened at or near its lows, shot up much higher and then reversed to close near the open.

The Body

Ideally, the real body of the shooting star should gap away from the previous candles’ real body. While it is not necessary, it adds confirmation to the validity of the impending reversal.

Why? Again, it all has to do with exhaustion in either direction.

Additionally, take a look at the previous candles; many times you will see overhead shadows on those candles as well. This indicates that the stock is struggling to go higher; just another clue as to what might happen.

When a shooting star forms near a resistance level, a very powerful resistance level is created.

As mentioned before, the shooting star is a short term topping formation, and any break above the high of this candle is a failed confirmation.

Variations

There is one variation to the shooting star you should consider; it is known as the gravestone doji. The gravestone doji is a shooting star with virtually no real body, the open and close are exactly the same.

This formation is more powerful than the typical shooting star and portends a more serious reversal.

Summary

Candlestick patterns are a great way to assess the trend of a stock. The key to its secret is the fact that candlesticks are a visual representation of price action.

These reversal candles can help the astute trader anticipate a trend change or continuation. Just remember, you need other validation points. These can come in the form of a technical indicator or other chart patterns.

How Can Tradingsim Help?

You can use Tradingsim to scan the markets and locate these candle reversal patterns. You can then apply your own trading strategy to find the optimum setups for profits.

Work on developing your own specific rules for entries, stops, and targets.

As always, be sure to ask yourself the following questions when practicing any setup:

what qualities work for each particular setup
what criteria were met, or not met
how was volume associated with the pattern
where could you have set your risk and profit target
how many of your trades worked or didn’t work

Ever wonder if a doji candle is bullish or bearish? How about a spinning top? Our goal in this tutorial is to uncover the fundamentals of indecision candlestick patterns, their significance, and a few strategies for how to trade them. By the end, you should be able to spot bullish and bearish dojis, spinning tops, and haramis!

The world of candlestick patterns is exciting. It’s like learning a new language, especially when you are new to the world of trading. At first, charts can appear daunting and mysterious. Like a bunch of noise. But with proper education, candlestick patterns can uncover a world of meaning and opportunity.

Before we move forward, if you haven’t studied the basics of candles and candlestick patterns, be sure to check out our introduction guide.

What Are Indecision Candles?

Indecision candlesticks are just that: a candle that represents indecision in the markets at a given point in time. The reflect either a pause in price action, or a temporary stalemate between bulls and bears.

But do not be confused. Just because they are called indecision candles, doesn’t mean we can’t interpret the candles.

Most indecision candles are referred to as dojis, spinning tops, or harami candles. They are all quite similar in that they visually represent a small bodied candle on a chart.

Depending on the context, these candles can be bullish or bearish. They can even be neutral in a sideways/non-trending environment.

What we have to pay attention to as traders is the reaction. In other words, what happens next?

But before we get into recognizing strategies and examples, let’s have a quick refresher on how indecision candlesticks are formed.

How Indecision Candles Are Formed

Bullish Doji Candle formation — Bullish indecision candles

Here we have an example of a bullish doji, or spinning top, depending on how you want to look at it. They are generally narrow bodied candles with wicks at both ends, both of which are very important.

Why do we call it a bullish doji candle is this instance? Mainly because it close green. But we’ll dig deeper into the “why”.

Why are the wicks important?

Generally speaking, wicks at the bottom of a candle indicate demand. Wicks at the top of a candle indicate selling pressure. Why else would the price have stopped at those levels and retracted?

Of course, this is an overgeneralization as there is buying and selling going on the entire time. But this does reveal something to the perceptive trader about the character of the candle.

In short, the key takeaway is that there is no decisive close at the highs, or the lows.

As a result, what is left is a narrow body candle where the price closes near the open of the candle.

Why is the narrow body important?

Bulls and bears were both very active, but neither could gain the upper hand. The outcome of all that effort is essentially ending up where they both began.

You might call it a standoff.

In order to help visualize this, you might imagine the direction of price action as the candle forms — the natural ebb and flow of buying and selling.

Inside the formation of a bullish doji indecision candlestick — Inside the formation of a bullish doji indecision candle

This can occur in either direction, up or down, as mentioned earlier. To form the body of the candle, we first get a sell off. After the sell off comes a nice bullish rally. However, as the bulls lose steam, bear regain some control into the close of the candle with selling pressure.

The candle closes green, so we call it a bullish doji.

Here’s another example in the opposite direction, just to stay well-rounded:

Inside the formation of a bearish doji indecision candle

This time the bulls start out in control and push the price of the stock higher. Unfortunately for them, there is a huge selloff as supply outweighs demand. But towards the close, there is a glimmer of hope for the bulls as they rally back.

Because this candle closes ready, however, we’d call it a bearish doji candle.

If you think of it in terms of “who is in control,” it can really help tell the story. If the open price is your typical average price paid, once the price dips below that level, the buyers at the highs are now under water.

What happens?

Bears take advantage of their vulnerability, slamming the price lower by shorting, as bulls sell, sell, sell.

On the contrary, once the price reaches an “oversold” level, bears start taking their profits and bull start coming back to buy at lower price. Thus we have a rally.

But overall, the big picture is that there was a lot of buying and selling going on. But no one has a clear upper hand by the time the candle is closed.

Now that we have covered the basics of what Indecision Candles are and how they are formed. Let’s look at some examples of the types of indecision candle patterns you might run into while trading.

4 Bullish and Bearish Indecision Candle Patterns

In these sections, we’ll look at two types of doji candles, the Dragonfly Doji and the Gravestone Doji. We’ll also examine the Spinning Top and Harami candles.

1. Gravestone Doji

Be sure to check out our other posts for an in depth look at how to trade using the Gravestone Doji reversal pattern, along with other candlestick pattern resources.

Visually, it is long narrow wick, with a very narrow base at the bottom. There is virtually no body in the candle. Imagine the side profile of a gravestone. This is it’s namesake.

Similar to other dojis, the price of the opening of the candle is almost identical to the close. Only this time, the open was at the very low.

As the candle forms, it pushes higher, only to find exhaustion at the highs. Consequently the price collapses on itself and closes where it started.

Context

When you find a Gravestone Doji in an uptrend, what is it telling you? If price is being pushed higher in the trend only to reverse on itself, that is weakness, right? We can call this a bearish Gravestone doji candle.

Let’s look at an example with JMIA on a 1-minute chart:

JMIA bearish Gravestone Doji Example — JMIA intraday chart with Gravestone Doji Indecision Candlestick Pattern

Now, you’re probably thinking, “why do we call it an indecision candle if it is a possible reversal pattern?”

Again, it all boils down to context, context, context.

In this example, pay close attention to the trend. Then narrow your focus on the volume signature associated with the Gravestone Doji candles. Note how elevated the volume is there compared to the rest of the candles on the chart. That’s the context you need: effort versus result.

The effort comes in to push the stock price higher, but it reverses on heavy volume.

Where Should You Enter?

Because these are indecision candles, we need to wait for confirmation. Imagine if you had taken the first Gravestone Doji to the short side in the example above. You would have been stopped out.

Sometimes it is better to wait for a close below the bearish doji, a nice red candle, to confirm our thesis. In the example above, we don’t get that red close until the second Gravestone candle.

Now, what if you spot one of these in a down trend? Would you consider it strength or weakness? A bullish or bearish doji candle? Think about it for a moment. Price tries to rally, but it gets shoved back down.

Let’s look at an example:

JMIA intraday bearish Gravestone Doji candle explanation — JMIA intraday Gravestone Doji candle explanation

As you can see, it is all about the context, and all about the story behind the price and volume. Price tries to rally. However, it falls short after the Gravestone Doji dashes the hopes of the bulls. Thus, the downtrend continues.

For our entries, we wait for the close of the doji, and sell short on a close lower in the next candle or two. As always, set a stop at the high of the Gravestone Doji, or in the body of the wick.

2. Dragonfly Doji

The Dragonfly Doji is essentially a Hammer Candle, but with a narrower body. It can also be a bullish or bearish doji candle, but is considered the opposite pattern to the Gravestone Doji. For this reason, we’ll call it bullish.

As an indecision candlestick pattern, it has all the same qualities we have mentioned for the Gravestone Doji. Only this time, in reverse.

Selling pressure comes in, creates a long tail/wick, then buyers show up to raise the price of the stock.

Why is this indecision? It all has to do with context.

Context

Let’s suppose we are in a downtrend. Sellers appear to be in control. However, we are surprised when the price begins to reverse, culminating in a bullish Dragonfly Doji pattern.

Such is the example with BABA below. We call it indecision because we are at a crossroads. Bears were firmly in control. Now, we aren’t sure anymore.

The answer lies in what comes next.

BABA intraday bullish Dragonfly doji candle pattern example. — BABA Dragonfly Doji indecision candlestick pattern

Clearly, bulls took advantage of the situation, and ultimately took control by reversing the trend.

Where Should You Enter?

Like the Gravestone Doji, you want to wait for a nice close to confirm the reversal. In this instance, we might weight for the next candle, or the second thereafter to break higher.

Stops can be set in the body of the Dragonfly Doji or lower depending on risk tolerance.

Dragonfly Dojis can show up in mid trend as well, offering opportunities to add to positions.

On the same intraday chart (BABA) from above, we see the healthy trend that followed our initial reversal. Take a moment and study this next chart to see how the handful of dojis we’ve pointed out lead BABA to higher prices.

BABA Dragonfly Doji Candlestick Pattern example — BABA series of Dragonfly Doji candlestick patterns

Effectively, they are areas of indecision that resolved higher.

3. Spinning Top

According to IG.com, the Spinning Top is known most often as a continuation pattern. The concept being similar to other indecision candles in a trending environment.

However, there are times, according to context, that the Spinning Top can signal a reversal of trend.

Spinning top bullish and bearish indecision candlestick patterns — Bullish and bearish Spinning Top candlestick patterns

As with most candlestick patterns, there is a bullish and bearish version to the Spinning Top. For a detailed explanation, be sure to revisit our discussion and slides above.

In short, for a bullish Spinning Top, it has to open, move lower, rally, and then close green. Flip this sequence for the bearish Spinning Top.

Let’s stick with our analysis of BABA and see if we can uncover a few Spinning Tops in the trend.

Context

Firstly, we notice that a bullish Spinning Top forms immediately after the bullish Dragon Fly doji candle at the bottom of the down trend. What is this telling us?

Look closely at the body of the three doji candles in secession at the bottom of the chart in the example belowe. Note that their opening and closing prices are all extremely close together. You have an Inverted Hammer, followed by a Gravestone Doji, followed by a Spinning Top.

Talk about indecision! Would these be bullish or bearish dojis?

What we see is that the bulls and bears were fighting to win this price level, judging by the tightness of the candle bodies and their closing prices. Bulls were defending this level heavily, while bears were trying to push it down.

Thus, the indecision on whether not we would go lower.

Bullish Spinning Top indecision candles — BABA bullish Spinning Top indecision candles

Thankfully for the longs, after the Spinning Top, the price moves decisively and violently higher on heavy volume, signaling our long entry. Now, we can decisively say it was a bullish doji pattern.

Secondly, we see another Spinning Top in the middle of the uptrend. What do we make of this? After all, we have been trending upwards. Could this be a reversal? Or, just a pause in the trend?

Perhaps you have some profit taking, but the trend doesn’t seem very extended. Let’s call this a pause, and look for a real Spinning Top reversal.

WATT gives us such a reversal with a spinning top on the intraday 1-minute chart in this example:

Where Should You Enter?

Ideally, the entry is on the break lower as the second candle forms and surpasses the Spinning Top body and wick. Some may wait for the close of that candle to confirm, others are willing to enter early and risk above the Spinning Top.

4. Harami

The Harami is a unique candlestick pattern. It can be a reversal or a continuation, though usually thought of as a reversal.

The name comes from the Japanese word for “pregnant.” Evidently, the Japanese thought the pattern resembled a pregnant woman.[efn_note]Chen, J. (2020, January 17). Bearish Harami Definition. Investopedia. https://www.investopedia.com/terms/b/bearishharami.asp#:%7E:text=%E2%80%9CHarami%E2%80%9D%20is%20the%20Japanese%20word,use%20as%20a%20trading%20signal..[/efn_note]

Along those lines, the Harami candle is a narrow body candle that is an “inside” candle. Hence the allusion to a baby in the body of the larger candle.

Bullish and bearish Harami doji candlestick patterns

For a bearish Harami candle, the body of the Harami must be a bearish or red/black doji candle immediately following a longer bodied bullish candle.

In contrast, the bullish Harami doji must be bullish/green and close inside a large bodied bearish candle.

Context

By now, you should understand what context will likely matter for the Harami, or any doji candlestick pattern. What do we look for?

Trend: up, down, sideways?
Volume signature
Extended? Oversold or overbought conditions?
Time frame?

These are just a handful of important criteria you will always want to consider when analyzing the efficacy of the pattern.

For example, if it is a bullish Harami pattern, is the stock in an oversold downtrend with a high volume spike signaling a reversal?

Or, is the stock in the middle of a young uptrend and only consolidating?

For the first example, lets look at FSR. After a steady decline followed by a massive flush on heavy volume, price pauses. It pauses inside the bearish red candle signaling indecision.

Price pauses then reverses with this FSR bullish Harami doji candle pattern

You expect price to continue lower after such a bearish red candle. Yet, to the surprise of the bears, the downward momentum is stopped and reversed.

It would be safe, then, to assume that the supply in that red candle was either absorbed, and/or no more sellers were present thereafter, sending the stock price higher.

On the flip side, you can find the exact same pattern as a bearish reversal at the top of an uptrend.

To switch gears on this pattern, let’s examine a continuation pattern with a bearish Harami pattern. The peculiar nature of this example is that it isn’t actually “bearish” for the overall trend. The name simply implies that there is a bearish/red Harami doji candle inside a bullish candle.

Bearish Harami in an otherwise continuing uptrend

You might be thinking, “Great, how confusing!”

But before you toss up your hands, remember that it is all about context, as we have been belaboring in each of these examples. Reversals are different from continuation patterns, and you’ll need to understand both in trading.

Here is the mirror image for a down-trending context:

TSLA bearish Harami candle continuation pattern

When Should You Enter?

For the Harami, you obviously want to pick the direction of the prevailing trend, or the new direction of the reversal. To do this, you need to wait for the confirmation.

In other words, is the Harami candle broken to the downside, or the upside, and what is the context. For a reversal long, take the next candle that breaks the upside of the Harami and set your stop below the Harami.

For a continuation downward, just reverse that process.

More Strategies For Trading Indecision Candles

These can be great patterns to play with the ABCD strategy. Be sure to check out our webinar on this explosive pattern!

For more on Haramis, our in-house trading expert Al Hill covers a handful of strategies in this fantastic tutorial.

How To Practice Indecision Candle Pattern Recognition

As with any trading strategy, experience is paramount. Do you have time to sit in front of the markets every day? If so, how many of these patterns will you be able to find? How long will it take you to master the patterns?

To that end, simulated training can supercharge your pattern recognition skills. Deliberate practice on your own time, coupled with analysis of your trades, are the most efficient method for learning volume and price analysis.

With enough practice, you might just find yourself an expert at discerning bullish and bearish doji candles like Gravestones, Dragonflies, Spinning Tops, and Haramis.

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. When correctly confirmed, the Gravestone Doji can lead to great opportunities for profit in day trading.

In this post, we’ll cover how to trade the Gravestone Doji with real examples, plus strategies on how to enter trades and manage risk based on this popular indicator.

7 Steps to Graveston Doji Trading Success

How is the Gravestone Doji Formed

The Gravestone Doji is a candlestick bar whose open, low, and close all culminate at the low of the bar.

Bearish Gravestone Doji Japanese candlestick pattern

As the name implies, imagine looking at the side profile of an actual gravestone. Hence the long upper wick and the narrow base at the bottom reflect what a gravestone would look like from the side. The Japanese were fond of naming candlestick patterns for their likeness in real-life.

You might also say that a Gravestone Doji represents the gravestones of the bulls that have died defending their territory.

As mentioned, the Gravestone Doji is a bearish trading setup. For this reason, its success rate is greatly increased when the candle forms at a market top.

Its bullish counterpart is the Dragonfly Doji. We cover this pattern in another post.

The psychology behind the candle is that the bulls were in control in the beginning. They drive the price of the security up to an unsustainable level. From there, the bears take control and are able to sell the security down to its low by the end of the session.

Contextually, when this occurs at the highs of an extended uptrend, we interpret this as exhaustion. This gives us the confidence to take a short position when all criteria are confirmed.

Charting Example of Gravestone Doji

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

Bearish Reversal Doji Candle Example — Bearish Reversal Candle Example

Above is a classic Gravestone Doji at the end of an uptrend.

Showing up this late in the uptrend, it was an early sign that the bulls were losing control and a price drop was likely on the horizon.

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

Our job as traders is to use these price analysis tools to help us take advantage of opportunities like this.

While this first example covers a bearish reversal setup, we can find some examples as continuation patterns. It is essentially the same as a reversal, just on a smaller rally.

Bearish Doji downtrend continuation pattern — Bearish doji downtrend continuation pattern

Note the attempt to rally here, only for bears to quickly reassert their dominance in the downtrend. Markers like this can offer opportunities to add to short positions with confidence as you manage the down-trending trade.

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 for this strategy will vary due to the size of the wick. We will cover this in more detail shortly.

Entering 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 the candlestick pattern, you will want to find a trigger that lets 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.

Bearish Gravestone Doji Trigger Line — Doji Trigger Line

In the image above, we outline the trigger line that shows the exact moment when you should short the stock after identifying the doji candle.

The reason you want to wait for a close below that line is clear. We see a slight hesitation comes on the next candle, which is relatively small and doesn’t manage to break the trigger line.

What if this had continued higher?

Let’s look at the example from above one more time to see when that might occur:

This image has an empty alt attribute; its file name is image-31.png — Bearish Reversal Doji Candle Example

Notice that the first reversal doji gives us a false confirmation. We never close below the candle. It is the second doji that puts the nail in the coffin, no pun intended.

Thus, the short signal comes on the second candle after the doji with a break and close below the trigger line.

Risk Management when Trading the Gravestone

When you trade the 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.

Doji Trade Stop Loss and Trigger Line — Bearish Gravestone Doji with Stop Loss and Trigger Line

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 this particular candelstick pattern, we have devised a method for how to set profit targets for when to exit the trade.

Doji trade example with Profit Targets — Bearish Gravestone Doji with Profit Target

Ideally, we want to have our reward be at least double our risk. For that reason, here is a simple calculation:

The fist profit target equals the size, or range, of the doji candle. This would give us a roughly 1:1 reward/risk ratio. Not ideal, but at least we can lock in some profits.

The second profit target is double the size of the gravestone doji. This will get us closer to a 2:1 reward/risk ratio. Much better.

You will need to determine which profit target to use based on the volatility of the chart and the range of the Gravestone Doji wick.

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.

If you find yourself emotional, take a small portion like 1/4 of your position and bag those profits. This way, if you move your stop lower, you’ll never be red on the position, giving you patience to let it work.

Trading with the Gravestone Doji Candlestick Pattern

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

Example 1

Above is a 2-minute chart of AT&T intraday.

The trend is upward with a last push to increase price only to close lower. The result is a Gravestone Doji reversal candlestick.

The next candle after the doji breaks the trigger line, therefore we open a short position.

Our 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.

Profit targets will vary for different traders. Here at Tradingsim, we like to exit at the profit target. Our reasoning is that the stock market moves extremely fast, and you may not have the luxury of waiting on a bigger move.

In addition, there is the psychological strain of always wanting more, but never quite getting all of a move.

Of course, this can depend on the bigger picture and how oversold the stock is on multiple time frames. In this case, it may be worthwhile to wait for lower lows.

Patience can pay off sometimes, just don’t let the trade become a headache.

From our example above, 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.

Example 2

This is the 2-minute chart of Visa. 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.

Patience paid off.

Our initial target is located at a distance equal to twice the size of the doji pattern — shown by the blue line. This gives us a 2:1 Reward/Risk ratio, or “2R”.

While the price reaches our initial target on the chart after 6 minutes, we adjust our stop loss and hold the position in hopes of more profits.

Ultimately, 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, our signal to exit.

We nearly doubled our profits!

Tutorial Review

Let’s review a few bullet points on how to spot the Gravestone Doji pattern and trade it with success:

The Gravestone Doji candlestick pattern is a reversal formation, which usually comes at the top of a bullish trend.
The psychological factor behind the pattern says that the bulls bring the equity to an unsustainable level, where the bears take over.
Visually, traders say that this pattern symbolizes the side profile of a gravestone for the bulls.
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:
1. Seek a price move equal to the size of the formation. I recommend this for longer gravestone doji candles.
2. 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, be patient if the stock keeps trending in your favor. But follow these two simple rules:
1. Adjust your stop above the initial target.
2. Stay in the trade until you see two bullish candles in a row. This hints that the bearish move might be over.

How to Practice the Gravestone Doji

As with any pattern or strategy in the stock market, it takes time and effort to recognize them in real-time.

We recommend trading in a simulator with at least 20 successful attempts on this bullish reversal pattern before employing real money in the market.

Once you have your dataset, you can measure your success. Then you will have confidence to take the trade knowing your ratio of wins to losses!

Trading without candlestick patterns is a lot like flying in the night with no visibility. Sure, it is doable, but it requires special training and expertise. To that end, we’ll be covering the fundamentals of candlestick charting in this tutorial. More importantly, we will discuss their significance and reveal 5 real examples of reliable candlestick patterns. Along the way, we’ll offer tips for how to practice this time-honored method of price analysis.

Also, feel free to download our Candlestick Pattern Quick Reference Guide!

Why Do Candlestick Patterns Matter?

After all, there are traders who trade simply with squiggly lines on a chart. Astonishingly, some don’t even look at the charts! Instead, they pay attention to the “tape” — the bids and offers flashing across their Level II trading montage like numbers in The Matrix.

Level II montage gif — A Level II montage. Source: CenterPoint Securities

No doubt, there are countless ways to make money in the stock market. In fact, there is no right or wrong way to read a chart. But unless you are just a gambler, you need some form of data to make informed decisions.

We believe the best way to do this is by understanding candlestick patterns.

For newer traders, even reading candlestick charts can seem like an insurmountable learning curve. There appears no rhyme or reason, and no end to the amount of price and volume data being thrown your way.

It’s daunting, for sure. Especially when you’re just getting started.

But be of good cheer! There is a method to the madness. The method is in the patterns. The patterns reveal probabilities. And the right probabilities create opportunities.

More importantly, the right opportunities can create profits.

This is where candlestick patterns come in handy. They help us to decipher the patterns of the market. They’re like little road signs on crowded streets. And with enough repetition, enough practice, you just might find yourself a decent chart reader.

That’s why you’re here, right? To learn to navigate the murky waters of the market?

Trust us, it is a worthwhile endeavor.

Who Discovered the Idea of Candlestick Patterns?

Munehisa Honma, 1724-1803 The father of candlestick patterns — *Munehisa Honma, 1724-1803*[efn_note]https://ninjatrader.com/blog/candlestick-charting-legend-of-munehisa-homma/[/efn_note]

According to Investopedia.com, it is commonly believed that candlestick charts were invented by a Japanese rice futures trader from the 18th century. His name was Munehisa Honma.[efn_note]Farley, A. (2021, April 29). The 5 Most Powerful Candlestick Patterns. Investopedia.Com. https://www.investopedia.com/articles/active-trading/092315/5-most-powerful-candlestick-patterns.asp.[/efn_note]

Honma traded on the Dojima Rice Exchange of Osaka, considered to be the first formal futures exchange in history.[efn_note]NinjaTrader. (2019, April 17). Candlestick Charting: Legend of Munehisa Homma. NinjaTrader.Com. https://ninjatrader.com/blog/candlestick-charting-legend-of-munehisa-homma/.[/efn_note]

As the father of candlestick charting, Honma recognized the impact of human emotion on markets. Thus, he devised a system of charting that gave him an edge in understanding the ebb and flow of these emotions and their effect on rice future prices.

Honma actually wrote a trading psychology book around 1755 claiming that emotions impacted rice prices considerably.[efn_note]Beyond Candlesticks: New Japanese Charting Techniques Revealed, Steve Nison , Wiley Finance, 1994, ISBN 0-471-00720-X.[/efn_note]

When all are bearish, there is cause for prices to rise.
Munehisa Honma[efn_note]Beyond Candlesticks: New Japanese Charting Techniques Revealed, Steve Nison , Wiley Finance, 1994, ISBN 0-471-00720-X, p14.[/efn_note]

In recent history, Steve Nison is widely considered the foremost expert on Japanese candlestick methods. After all, he wrote the book that catapulted candlestick charting to the forefront of modern market trading systems.

Beyond Candlesticks: New Japanese Charting Techniques Revealed, is one of his most popular books and a definitive resource for candle patterns.

Since the 90s, this method of charting has become pervasive throughout all financial markets: equities, futures, forex, and more.

In his books, Nison describes the depth of information found in a single candle, not to mention a string of candles that form patterns. It truly puts the edge in favor of a skilled chartist.

The Story That Candlesticks Tell

Candlesticks are telling us a story. The story is a reflection of what buyers and sellers are doing.

Emotions and psychology were paramount to trading in the 1700s, just as they are today. This is the foundation of why candlesticks are significant to chart readers.

How so?

Every candle reveals a battle of emotions between buyers and sellers.

As the great trading psychologist Brett Steenbarger notes, “proper training is the best source of discipline and the most effective safeguard against intrusive anxiety and impulsivity.”

With this in mind, understanding the emotional story within candlesticks is a great place to start that training.

How are Candlesticks Formed?

There are three types of candlestick interpretations: bullish, bearish, and indecisive. This is painting a broad stroke, because the context of the candle formation is what really matters. But for all intents and purposes, we’ll stick with these three categories.

The elements of a candlestick graph — The elements of a candlestick

What Is a Candlestick?

The formation of the candle is essentially a plot of price over a period of time. For this reason, a one minute candle is a plot of the price fluctuation during a single minute of the trading day. The actual candle is just a visual record of that price action and all of the trading executions that occurred in one minute.

Similarly, a daily or weekly candle is the culmination of all the trading executions achieved during that day or that week.

The open tells us where the stock price opens at the beginning of the minute. The close reveals the last recorded price of that minute. The wicks (also known as shadows or tails) represent the highest and lowest recorded price from the open and close.

According to Nison, the Japanese placed much less emphasis on the highs and lows of individual candles. For them, as it is for modern technicians, the opening and closing prices were more relevant.[efn_note]Beyond Candlesticks: New Japanese Charting Techniques Revealed, Steve Nison , Wiley Finance, 1994.[/efn_note]

Essentially, the broader context of candles will paint the whole picture.

What Is a Bullish Candle?

A bullish candle is formed when the price at the closing of the candle is higher than the open. This can be on any time frame: from a 1-minute candle to a 1-month candle. It will all be the same.

A bullish candle explanation — A bullish candle opens low and closes high.

Typically these candles close with a green or white body color, though most charting platforms allow for customization these days.

What Is a Bearish Candle?

Conversely, a bearish candle is assumed when the closing price is lower than the opening price. In other words, the price dropped in the amount of time it took for the candle to form.

A bearish candle explanation — A bearish candle opens high and closes low.

By default, most platforms will show a red or black candle as bearish.

What Does the Candle Formation Tell Us?

This is the real question we need to ask ourselves. It isn’t enough to know that the candle opened and then closed lower, or vice-versa.

As renowned trader and best-selling author Dr. Alexander Elder explains, “The main advantage of a candlestick chart is its focus on the struggle between amateurs who control openings and professionals who control closings.”[efn_note]Elder, A. (2014). The New Trading for a Living: Psychology, Discipline, Trading Tools and Systems, Risk Control, Trade Management (Wiley Trading) (1st ed.). Wiley.[/efn_note]

Dr. Elder may be referring to daily candles, but his point is still important. The candle represents a struggle between buyers and sellers, bulls and bears, weak hands and strong hands.

Every trader wants to understand the price action and read it well to improve their trading. Studying candlestick patterns helps us understand the price action and where the stock is more likely to go the next minute or the next few minutes.

Armed with that knowledge, let’s dig in and see what picture those little candles are trying to paint for us.

The High of the Candle

The high of each candle, whether it is the tip of the wick at the top, or if the body closes at the top, represents the maximum effort of bulls. If it is a daily candle, buyers could not push the price of the stock one cent more during that day.

Why is that important? There are two reasons:

This could represent a near term level of resistance which will have to be broken for the price to move higher.
In order to find enough demand to push through that resistance, the stock may need to consolidate lower until enough shares are accumulated.

The Low of the Candle

Just as the high represents the power of the bulls, the low represents the power of the bears. The lowest price in the candle is the limit of how strong the bears were during that session.

Why is this important? Again, two reasons:

This could represent a near term level of support where bulls were able to stop the downward momentum
To move lower, more supply may need to enter the market at higher prices.

The Closing Price of Each Bar

This is where the story gets interesting.

When a candle closes above its opening price, we can assume that the bears won in some form or fashion. How much it closes above the open tells us with what intensity the bulls were in control during that session.

Let’s look at few examples to better understand this:

In this chart, we see the “Three White Soldiers,” which is a candlestick pattern describing three bullish candlesticks in a row. What can we interpret from this?

Three White Soldiers candlestick pattern

It is clear to see that the candles open low and close high. Bulls were clearly in control during each session with very little energy from the bears.

Now contrast that with what we see in the next example. Ask yourself, who was in control during this session?

Apparently there is indecision as to who is in control. How do we know? Think about the story behind this “Spinning Top” candle:

The stock opens, proceeds lower as bears are in control from the open, then rips higher during the session. But after putting in a decent high, the bulls settle back and give the bears some control into the close.

Are you beginning to see how the story unfolds?

These are the stories that candles tell us on charts. Who is in control (greed), who is weak (fear), to what extent they are in control, and what areas of support and resistance are forming.

The Range between the Open and Closing Price

This is one of the most important aspects of interpreting candles. As Dr. Elder notes, the range between open and close “reflects the intensity of conflict between bulls and bears.” [efn_note]Elder, A. (2014). The New Trading for a Living: Psychology, Discipline, Trading Tools and Systems, Risk Control, Trade Management (Wiley Trading) (1st ed.). Wiley. p 53.[/efn_note]

In day trading, momentum is everything. On this token, the character of the candles can tell us if there is demand or if a stock is sleepy and uninteresting — whether we are about to launch, fall off a cliff, or just grind sideways.

Additionally, the nature of the candles can tell us when to enter with tight risk. Or, when to take profits into climactic candles.

In the end, it all boils down to context and the story of buyers and sellers behind the tape.

5 Real Examples of Reliable Candle Patterns

Without practice, none of this information really matters. It takes screen time and review to interpret chart candles properly. There are no free lunches in the markets.

With that being said, let’s look at some examples of how candlestick patterns can help us anticipate reversals, continuations, and indecision in the market.

1. The Hammer / Hanging Man

The hanging man occurs at tops and the hammer occurs at bottoms.

The Hanging Man is a candlestick that is most effective after an extended rally in stock prices. The story behind this candle tells us that there were extensive sellers in the formation of the candle, signified by the long wick.

It is usually accompanied by heavy volume.

The Hanging Man pattern — The Hanging Man appears at the top of an extended uptrend before reversing.

The Hammer is another reversal pattern that is identical to the The Hanging Man. The only difference is the context. The Hammer occurs at the end of a selloff, signifying demand or short covering, driving the price of the stock higher after a significant selloff.

Like the Hanging Man, you want to see a solid volume signature associated with these candles.

The Hammer pattern — Hammer candles appear at the bottom of a downtrend before a reversal

2. Engulfing Patterns

Engulfing patterns offer a great opportunity to go long while keeping risk defined to a minimum. As you can see in the example below, the prior bearish candle is completely “engulfed” by the demand on the next candle.

A bullish engulfing candlestick pattern — A bullish engulfing candle at the market open.

Another example of engulfing patterns is the Bearish Engulfing Sandwich. Here we have what appears to be a bearish reversal, but the next candle completely swallows the supply from that red candle:

A bearish engulfing sandwich, also know as a stick sandwich — A bearish engulfing sandwich pattern, also know as a stick sandwich

3. The Morning Star

The Morning Star is yet another reversal signal. It can be found at the end of an extended downtrend or during the open. It takes 3 candles to confirm the setup.

The first candle must be a strong downtrending candle.
The second candle is the star. It’s usually a narrow body candle that, ideally, does not touch the body of the prior candle.
The third candle is a strong bullish candle confirming the new uptrend.

The morning star candlestick pattern explained at the open — The morning star candlestick pattern at the open

4. The Evening Star

Similar to the Morning Star, the Evening Star is its bearish cousin. It forms at the top of parabolic or extended bullish runs. Much like the Morning Star, the body of the candles should not touch.

Here are three criteria for spotting the shooting star:

The bodies do not overlap
The third candle is a strong bearish candle closing into the body of the first candle
Volume should increase from left to right in the pattern

The Evening Star explained on GME — The Evening Star candlestick pattern on GME

As with all of these formations, the goal is to provide an entry point to go long or short with a definable risk. In the example above, the proper entry would be below the body of the shooting star, with a stop at the high.

5. Indecision Candles

The doji and spinning top candles are typically found in a sideways consolidation patterns where price and trend are still trying to be discovered.

Indecision candle patterns — Indecision candlestick patterns

The “doji’s pattern conveys a struggle between buyers and sellers that results in no net gain for either side,” as noted in this great article by IG.com.

Will it continue upward? Go sideways? Or reverse?

With indecision candles, we typically need much more context to answer these questions.

The Gravestone Doji is a perfect example of this:

The Gravestone Doji indecision candlestick explanation — Gravestone Doji candles can represent indecision on a chart.

Note the trend is mostly sideways in this first circled example. For this reason, waiting for the reaction to these candles is usually best for risk management.

Eventually, the price falls in this particular case as the trend becomes more extended into the rally. Correspondingly, the Shooting Star that occurs just beyond the Gravestone Doji is confirmation of that falling price action.

The Best Way to Practice with Candlestick Patterns

As always, it is best to practice a strategy before putting money to work in the market. There is no better way to do this than with a simulator.

One of the best methods to train your “chart eye” to see these patterns is to simply replay the market, noting each time you see a particular candle.

As you put in deliberate practice, ask yourself the following questions:

What candle formation is this?
What is the context? Uptrend? Down trend? Sideways?
Does this candle meet the criteria for a proper reversal?
Where could I enter with the least amount of risk?
What would confirm the pattern?

We have a wealth of knowledge on many different candlestick patterns, so be sure to check out those lessons, too!

Stars, Dojis, and Abandoned Babies — Powerful Reversal Strategies

What are Candlestick Stars?

Types of Candlestick Stars

The Body

Exhaustion Gaps

Psychology of the Candlestick Star Pattern

Candlestick Star Variations

Morning Star

Assessing the Strength of the Morning Star Signal

Morning Star Trading Example

Evening Star

Evening Star Formation

Doji Stars

Abandoned Baby Candle

The Shooting Star

The Body

Variations

Summary

How Can Tradingsim Help?

What Are Indecision Candles?

How Indecision Candles Are Formed

Why are the wicks important?

Why is the narrow body important?

4 Bullish and Bearish Indecision Candle Patterns

1. Gravestone Doji

Context

Where Should You Enter?

2. Dragonfly Doji

Context

Where Should You Enter?

3. Spinning Top

Context

Where Should You Enter?

4. Harami

Context

When Should You Enter?

More Strategies For Trading Indecision Candles

How To Practice Indecision Candle Pattern Recognition

How is the Gravestone Doji Formed

Charting Example of Gravestone Doji

Trading the Gravestone Doji

Entering a Gravestone Doji Trade

Risk Management when Trading the Gravestone

Profit Targets for the Gravestone Doji Pattern

Risk Management after Reaching Target 1

Trading with the Gravestone Doji Candlestick Pattern

Example 1

Example 2

Tutorial Review

How to Practice the Gravestone Doji

Why Do Candlestick Patterns Matter?

Who Discovered the Idea of Candlestick Patterns?

The Story That Candlesticks Tell

How are Candlesticks Formed?

What Is a Candlestick?

What Is a Bullish Candle?

What Is a Bearish Candle?

What Does the Candle Formation Tell Us?

The High of the Candle

The Low of the Candle

The Closing Price of Each Bar

The Range between the Open and Closing Price

5 Real Examples of Reliable Candle Patterns

1. The Hammer / Hanging Man

2. Engulfing Patterns

3. The Morning Star

4. The Evening Star

5. Indecision Candles

The Best Way to Practice with Candlestick Patterns