Trading based on gravestone dojis

Take a look in this section at a couple of examples of gravestone dojis that have popped up in the real world and what happened afterward. The two examples I provide are for stocks, not commodities. The first example, which you can see clearly in Figure 5-23, is a gravestone doji that offered a useful sell signal followed by lower prices.

I included several days of price action to show a combination of interesting factors:

I First, notice that this gravestone doji signals the beginning of a pretty prolonged downtrend in the stock.

i Second, notice that during the downtrend, there are a couple of smaller gravestone dojis. If you'd shorted on the first gravestone doji and kept on the short position, you would've been pretty happy with the results. The appearance of a couple more bearish formations would've given you the confidence to maintain your short position.

Figure 5-22:

A 30-minute chart of a day that creates a gravestone doji on a daily chart.

Figure 5-22:

A 30-minute chart of a day that creates a gravestone doji on a daily chart.

Figure 5-23:

A great example of the gravestone doji working as a sell signal.

Figure 5-23:

A great example of the gravestone doji working as a sell signal.

iS Finally, there's a fourth gravestone doji toward the end of the downtrend. Notice that it fails fairly quickly, as the following day has a high equal to the original gravestone doji's high. If you'd ridden the stock price down to this level and seen a sell signal fail, it would've been time to buy the stock back, take your profit, and move on to the next trade. That would be a profitable outcome for you.

The next example shows what can happen if you're not as fortunate. Figure 5-24 is a chart of Apple Computer's stock (AAPL). A gravestone doji appears in the middle of the chart and during an uptrend. Dojis are often associated with a trend change, and seeing the bearish doji in an uptrend may be a signal of a trend change to the down side. Unfortunately for anyone trading this sell signal, things don't work out so well.

The gravestone doji is initially followed by a couple of down days, and it does appear that the trend may be changing. However, a couple of positive days put this trend change in doubt. A couple of days later resistance is tested and broken, and the uptrend continues. The sell signal failed, but a nimble trader would've placed a buy stop to limit the losses on this failure.

Figure 5-24:

The gravestone doji failing on a chart of AAPL.

Figure 5-24:

The gravestone doji failing on a chart of AAPL.

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