There are many candlestick patterns that traders use to enter into a trade.
The Gravestone Doji and Dragonfly Doji are two of them.
And I would say it’s two of the more significant candlestick patterns because of the psychology behind their formation.
But many traders make the mistake of trading them the wrong way.
And because of that, they go broke.
In this post, I’ll show you how to trade the Gravestone Doji & Dragonfly Doji like a pro.
So you will be confident that you will be profitable over a series of trades in the long run.
But, first thing’s first…
What On Earth Is The Gravestone Doji & Dragonfly Doji?
When I first heard of the Gravestone Doji a decade ago, I nearly died laughing to my own gravestone.
And when I heard about the Dragonfly Doji, I started to think that there could be a Butterfly Doji or maybe even a Bumble Bee Doji.
But to my dismay, the Dragonfly Doji is the only flying species of doji available.
Okay, enough jokes.
Let’s get serious now…
Because these two ridiculously named candlesticks can make you some serious money in the markets when traded correctly.
So rather than focus on their names, I want you to understand the psychology behind how these two candlesticks are formed.
That is what’s most important to help you trade the markets with an edge.
The Significance of The Gravestone Doji & Dragonfly Doji
The Gravestone Doji is a candlestick that opens and closes at the low, and has a long wick upwards.
What this signifies is that the bulls have tried to push price higher from the open, but then the bears pushed back down to close at the low.
This is a rejection of the upside.
And is considered a bearish signal.
It shows that the selling pressure is stronger than the buying pressure on this candlestick.
The Dragonfly Doji pattern is the opposite of the Gravestone Doji.
It opens and closes at the high, with a long wick downwards.
This signifies that the bears have tried to push price downwards, but eventually gets pushed back up to close at the high.
This is a rejection of the downside.
And this considered a bullish signal.
It shows that the buying pressure is stronger than the selling pressure.
So the question that’s probably on your mind is:
“Should I enter into a Short trade whenever I see a Gravestone Doji?”
Or…
“Should I or get into a Long trade whenever I see a Dragonfly Doji?”
The answer is…
HELL NO.
Because that’s the surest way to lose all your money very quickly…
And drive you to your own gravestone (no pun intended).
In case you decide to ignore my advice and trade every Gravestone & Butterfly Doji, I’ve lovingly prepared for you your gravestone 🙂
So why can’t you go Short or Long when you see a Gravestone Doji or a Dragonfly Doji respectively?
You see, while the candlestick itself signifies either a bullish or bearish outlook, it doesn’t signify the market sentiment as a whole.
And that’s because a Gravestone Doji can be followed by a bullish candlestick like this:
And a Dragonfly Doji can be followed by a bearish candlestick like this:
So how then should you trade these two candlestick patterns?
How To Trade The Gravestone Doji & Dragonfly Doji
Like all the other candlestick patterns, these two candlestick patterns should only be used as an entry confirmation, and not as a standalone entry.
What that means is that you only enter into a trade with the Gravestone Doji or Dragonfly Doji once you see a reason to do so.
Here are 4 main reasons to enter into a trade using these two candlestick patterns:
- A Gravestone Doji is formed at a key resistance level
- A Gravestone Doji is formed at a dynamic resistance level
- A Dragonfly Doji is formed at a key support level
- A Dragonfly Doji is formed at a dynamic resistance level
1. Trading the Gravestone Doji Using Resistance Levels
Here are the steps to take to enter into a Short trade using the Gravestone Doji:
Step 1: Identify Trend on Higher Timeframes
The very first step is to identify whether the market is trending up, down, or going sideways.
Because the Gravestone Doji is a bearish candlestick, you want to only trade this in a downtrend, or a sideways market.
Most people only trade in a trending market, but trading a sideways market can also be profitable when done right.
So if you’re trading on a H1 timeframe, then you want to see the trend on the H4 timeframe.
And if you’re trading the H4 timeframe, then you want to see the trend on the D1 timeframe.
Step 2: Identify Resistance Levels
Once you have identified a downtrend or a sideways market in the higher timeframes, you want to now identify key resistance levels.
The way you find resistance levels is by looking to the past history at the left-hand side of your chart and see where price has previously reversed.
Then draw a line at the high of the candlestick like this:
Additionally, I also like to draw a resistance line at the high of the bodies like this:
This creates what I call a “resistance zone”.
This will be where I will pay attention to price when it gets into this area.
Now, if you’re wondering what’s the right way to draw a resistance level, the answer is that there is no one definite way to do so.
Some traders like to plot resistance levels at the end of the body only.
Some traders like to plot resistance levels at the high of the candlestick only.
Some traders like to use a box to mark out an area of possible resistance.
Any one of the above are viable ways of plotting resistance levels.
Some times price turn around just before the resistance level, and some time price turns after it.
As long as you plot the lines around where prices have stalled or turned around, that’s good enough.
It’s not like one trader is going to make more money than the other just because he draws a resistance level differently from the other trader.
What’s important is seeing how price react once it reaches near those resistance levels.
If it stalls around that area, then you want to pay attention to it because it might start to reverse.
By drawing these resistance levels, you will where the potential Shorting opportunities are in the future.
Here’s a big tip: The higher the time frame, the more significant the resistance level is.
That’s the reason why I prefer to identify support and resistance levels at the Daily timeframe chart, and the H4 timeframe chart.
If you’re doing intraday trading, you can plot resistance levels as well, but it’s not going to be as significant as the higher timeframes resistance level.
Once you have drawn your resistance levels, what you want to do is wait for the price to reach those levels and see if a Gravestone Doji is formed.
Step 3: Wait For A Close Below The Gravestone Doji
Now that price has formed a Gravestone Doji, you don’t want to go Short yet.
Instead, wait till the next candlestick closes below the Gravestone Doji like this:
Step 4: Place Short Trade
Once the price closes below the Gravestone Doji, go Short and place Stop Loss above the high of the Gravestone Doji (at least 10 pips above the high on the H4 timeframe) and place a Take Profit at either 1.5R or 2R.
So if your Stop Loss is 50 pips away from your Entry Price, then you want to place a Take Profit either at 75 pips or 100 pips below your Entry Price.
2. Trading the Gravestone Doji Using Dynamic Resistance Levels
The other way to trade Gravestone Dojis is using dynamic resistance levels.
Dynamic resistance levels are created by moving averages.
Take a look at this chart:
Notice that there have been numerous times when price reached the moving average, it goes back down (marked by the red arrow).
So here are the steps to trade the Gravestone Doji with dynamic moving average resistance:
Step 1: Plot 20 EMA & 50 EMAÂ
For our dynamic resistance, we will use the Exponential Moving Average (EMA). I use the 20 EMA and 50 EMA.
All trading platforms should have the Exponential Moving Average as a default indicator.
If your broker doesn’t provide you with a trading platform that has the EMA built-in, then its time to consider a new broker.
Step 2: Identify Trend on Higher Timeframes
For this, we only want to make this trade if the higher timeframe is on a downtrend.
The reason is because with dynamic resistance, instead of looking for prior resistance levels, we are just simply looking for a lower high and lower low.
And to identify whether or not the market is in a downtrend, the 20 EMA has to be below the 50 EMA.
Step 3: Look For Downtrend on The Timeframe You’re Trading
Once you have identified a downtrend on the bigger timeframe, you want to find a currency pair that is trending down on the timeframe you’re going to trade on as well.
So if you’re trading on the H4 timeframe, then you want to find a currency pair where the 20 EMA is below the 50 EMA on that timeframe.
Step 4: Wait For Price to Reach Either of the EMAs
Once you have identified a currency pair that is in a downtrend, wait for price to retrace back to either the 20 EMA or 50 EMA.
When price has retraced back to the EMAs, see if it forms a Gravestone Doji.
Step 5: Place Short Trade
If a Gravestone Doji has been formed, wait for price to close below the Gravestone Doji and go Short with a Stop Loss above the high of the Gravestone Doji, and a Take Profit level of 1.5R or 2R.
3. Trading the Dragonfly Doji Using Support Levels
Taking a Long trade using support levels with the Dragonfly Doji is the exact opposite of taking a trade using resistance levels with the Gravestone Doji.
Step 1: Identify Trend on Higher Timeframes
Since we are looking for a Long trade, we only want to trade if the higher timeframe is on an uptrend or moving sideways.
Step 2: Identify Support Levels
Similarly to resistance levels, we want to place our support lines at the low of the candlestick and at the end of the body of the candlestick.
These lines will be our support zones.
If you noticed in the chart above, the support level at 0.64326 held well on two instances.
You can see that price bounced off that support level twice and went higher.
Step 3: Wait For A Close Above The Dragonfly Doji
Since we are going for a Long trade with the Dragonfly Doji, we want to wait for price to close above the high of the Dragonfly Doji like this:
Step 4: Place Long Trade
Once price closes above the Dragonfly Doji, go Long with Stop Loss below the low of the Dragonfly Doji and place Take Profit at either 1.5R or 2R.
4. Trading the Dragonfly Doji Using Dynamic Support Levels
This is basically the opposite of trading dynamic resistance levels with the Dragonfly Doji.
Since we already have plotted the 20 EMA and 50 EMA, here are the steps to trade the Dragonfly Doji with the dynamic moving average resistance:
Step 1: Identify Trend on Higher Timeframes
For this, we only want to make this trade if the higher timeframe is on an uptrend.
And to identify whether or not the market is in an uptrend, the 20 EMA has to be above the 50 EMA.
Step 2: Look For Uptrend on The Timeframe You’re Trading
Once you have identified an uptrend on the bigger timeframe, you want to find a currency pair that is trending down on the timeframe you’re going to trade on as well.
So if you’re trading on the H4 timeframe, then you want to find a currency pair where the 20 EMA is above the 50 EMA on that timeframe.
Step 3: Wait For Price to Reach Either of the EMAs
Once you have identified a currency pair that is in an uptrend, wait for the price to retrace back to either the 20 EMA or 50 EMA.
When the price has retraced back to the EMAs, wait for a Dragonfly Doji to be formed.
Step 4: Place Long Trade
If a Dragonfly Doji has been formed, wait for price to close above the Dragonfly Doji and go Long with a Stop Loss below the low of the Gravestone Doji, and a Take Profit level of 1.5R or 2R.
Understanding the Psychology of Candlestick Patterns
In this post, I have shared with you the trading strategy to trade the Gravestone Doji and Dragonfly Doji.
However, these strategies I shared with you above isn’t just limited to these two candlestick patterns.
In fact, when you trade, you shouldn’t be concerned about the names of candlestick at all.
What you want to understand is the psychology behind the formation of these candlesticks.
So for Long trades, what I really look out for is for price to show a rejection of the lows and close near the high of the candlestick.
What this signifies to me is that the buying pressure is strong.
Then I will look out for confluence factors like support, where the EMA is at, and also the overall trend of the higher timeframes.
After which, it all comes down to trade management.
For Shorts, it’s the opposite.
I look out for any candlestick pattern to show that price rejects the high and close near the low.
Then likewise, I look out for confluence factors like resistance, where the EMA is at, and the overall trend of the higher timeframes.
When you think of it this way, you don’t have to deliberately search for Gravestone Dojis or Dragonfly Dojis on the chart just to make a trade.
Instead, you see what the market is doing, and you trade accordingly based on what price is telling you.
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