Understanding the Tombstone Doji Pattern – Trading Methods and Types

tombstone doji pattern: Candlestick patterns are an important technical tool for traders to understand price movements. Patterns formed on a candlestick chart over a specific period of time provide a potential view of a market reversal, continuation, or indecision. In this article, we will learn about tombstone doji and its meaning, characteristics, and strategies using a chart as an example.

What is Doji?

The word Doji comes from the Japanese word meaning ‘the same’. A doji is a candlestick pattern where the opening and closing prices of the candle are almost identical. Typically, a Doji formation signals current indecision, a reversal of a trend, or a continuation of security.

This pattern indicates that neither bulls nor bears are gaining control, creating uncertainty in the security. It looks like a candlestick with almost identical upper and lower wicks and a small or no body.

tombstone doji pattern

It is a type of Doji candle pattern that consists of a long upper shadow with the same open, close, and low prices or a small body. Unlike the doji star, which signals indecision, the tombstone candlestick signals a reversal. The Tombstone Doji is more stable when it forms at the end of an uptrend and indicates a possible bearish reversal.

The pattern formation indicates that buyers are trying to push the price higher, but the market rejects them, causing the price to fall and close at the candle’s opening price. Even if tombstone doji formations are uncommon, valid patterns should be identified. It is also similar to the inverse T-shape or the inverse of the dragonfly doji pattern.

What does Tombstone Doji mean?

The Tombstone Doji is a clear signal of bearish sentiment in the market. This signals a reversal of the existing bullish pattern.

Forming a pattern means:

• reversal signal: A tombstone doji usually appears after an uptrend. This means that the bulls will weaken and the bears may soon take control. Traders should be alert for potential trend reversals.
• indecision: The Tombstone Doji is a bearish pattern, but it indicates market indecision. The long upper shadow reflects the struggle between buyers and sellers and suggests uncertainty about the future direction of asset prices.

Trading Strategy with Gravestone Doji

Now that we have a better understanding of the Tombstone Doji pattern formation and its importance, let’s take a look at some trading strategies.

bearish reversal

In a strong uptrend, the formation of a Tombstone Doji pattern indicates the end of the bullish trend. This marks a reversal that forces traders to consider entering short positions.

entry:- When the price closes below the low point of the Tombstone Doji pattern formation, you enter a sell position on the security.

Stop Loss:- The logical stop loss is set at the high price of the Tombstone Doji pattern.

Profit Target:- The pattern does not define a profit target level, so you can place targets based on the risk-reward ratio or the next support level shown on the chart.

HDFC Bank chart depicting Tombstone Doji pattern formation.

Book profits from long positions

Pattern formation helps traders find technical exits for existing positions in a security. If you have a long position in a security, the formation of a tombstone doji pattern indicates indecision or a reversal of the trend. Therefore, traders can limit further profit reduction by liquidating existing long positions after the pattern is formed.

Tombstone Doji with Moving Averages

The Gravestone Doji pattern is combined with a short-term moving average as a double check to avoid generating false signals. We know that the formation of a tombstone doji indicates a trend reversal and initiates the entry of a sell position. Moving averages are applied to the charts to identify entry by pattern formation.

Pattern formation allows you to place a sell position into the pattern if the price closes below the moving average and the moving average confirms the entry.

If you look at the chart below, the 5-minute chart of AXIS Bank, you can see a pattern and price forming below the 5EMA. Double-check what has a good risk-to-reward ratio.

Limitations of tombstone doji

Tombstone Doji is a strong reversal signal, but traders should also be aware of the following limitations:

• The Tombstone Doji pattern creates false signals (sometimes low volume) which can result in losses.
• The effectiveness of a pattern may vary depending on market conditions.
• Pattern formations from previous downtrends are often not very reliable.

Finishing

The Tombstone Doji is a key tool for traders to identify potential bearish reversals in a security. Understanding its formations, strategies, and limitations helps traders make informed trading decisions.

Traders should always check pattern formations along with other technical tools to avoid false signals. Additionally, proper risk management with good risk-reward ratio and practice can help traders increase profitability in the long run.

Written by Deepak M

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