Gravestone Doji Candlesticks and Trend Reversal

The Gravestone Doji candlestick is one of three special cases of the doji candlestick, the other two being the Dragonfly Doji  and Long-Legged Doji.  The Gravestone Doji is a one period trading pattern with the open price equal to the close price  AND the close equal to the low. 

As with the previous post where the doji was backtested, I am using the powerful capabilities of Portfolio123 to evaluate the Gravestone formation.

Gravestone Doji Custom Formula

I used the following custom formula to represent the Gravestone Doji candlestick for testing in Portfolio123:

$DragonflyDoji = Eval(ABS((Open(0)-Close(0))/(Hi(0)-Low(0))) < 0.001,TRUE,FALSE) And (Close(0) = Low(0))

In order to test for a trend condition I used the Relative Strength Index (RSI) with a 14 day period.  RSI(14) < 30 was considered to be a downward trend.  RSI(14) > 70 an upward trend.  The number of trades and percent profit were recorded for four test cases:

1. Gravestone Doji occurs on the last trading day with a downtrend;
2. Close(0) = Low(0) with a downtrend (for comparison sake);
3. Gravestone Doji occurs on the last trading day with an uptrend;
4. Close(0) = Low(0) with an uptrend (for comparison sake).

Downtrend With and Without a Gravestone Doji Candlestick

All stocks in the PRussell 3000 Universe were tested between March 31, 2001 to January 20, 2012 using daily rebalancing and buy/sell at the next open.  PRussell 3000 is Portfolio123's version of the Russell 3000.

Long Entry:	RSI(14) <= 30, $Gravestone Doji = TRUE		RSI(14) <= 30, %Profit
Long Exit:	# Trades	% Profit	# Trades	% Profit
NoBars >= 1	434	0.33%	23,351	0.60%
NoBars >= 2	426	1.25%	21,821	0.68%
NoBars >= 3	417	0.31%	20,901	1.09%
NoBars >= 4	414	1.50%	20,114	1.05%
NoBars >= 5	410	2.29%	19,528	1.37%
NoBars >= 6	407	1.13%	19,031	1.41%
NoBars >= 7	401	1.59%	18,644	1.50%
NoBars >= 8	397	2.68%	18,288	1.50%
NoBars >= 9	396	2.10%	18,000	1.64%
NoBars >= 10	391	1.76%	17,734	1.28%
NoBars >= 11	385	2.22%	17,530	1.48%
NoBars >= 12	380	2.28%	17,290	1.38%
NoBars >= 13	380	2.72%	17,115	1.73%
NoBars >= 14	378	2.97%	16,939	2.03%
NoBars >= 15	375	3.21%	16,803	2.18%
NoBars >= 16	375	2.56%	16,654	2.45%
NoBars >= 17	374	3.16%	16,540	2.86%
NoBars >= 18	371	2.54%	16,414	2.83%
NoBars >= 19	370	4.19%	16,326	2.72%

So it appears, according to the collection of data above, that a Gravestone Doji candlestick tends to signal the end of a downtrend, resulting in a good opportunity to enter a long position. The average profit after 20 holding days is about 4.2%.  It is interesting that a good portion of the profits (2.7%) are due to the close ending at the low.

Uptrend With and Without a Gravestone Doji Candlestick

Long Entry:	RSI(14) >= 70, $Gravestone Doji = TRUE		RSI(14) >= 70, Close(0) = Low(0)
Long Exit:	# Trades	% Profit	# Trades	% Profit
NoBars >= 1	767	-0.01%	7,879	-0.08%
NoBars >= 2	724	0.06%	7,221	-0.04%
NoBars >= 3	692	0.19%	6,767	0.06%
NoBars >= 4	664	0.19%	6,467	0.07%
NoBars >= 5	638	0.18%	6,242	0.21%
NoBars >= 6	621	0.23%	6,036	0.35%
NoBars >= 7	603	0.30%	5,864	0.46%
NoBars >= 8	593	0.46%	5,730	0.57%
NoBars >= 9	576	0.47%	5,598	0.72%
NoBars >= 10	567	0.46%	5,505	0.89%
NoBars >= 11	559	0.58%	5,419	1.01%
NoBars >= 12	548	0.60%	5,326	1.15%
NoBars >= 13	539	0.56%	5,258	1.31%
NoBars >= 14	535	0.70%	5,186	1.43%
NoBars >= 15	526	0.82%	5,129	1.51%
NoBars >= 16	519	0.89%	5,084	1.60%
NoBars >= 17	512	1.02%	5,041	1.73%
NoBars >= 18	509	0.97%	4,993	1.79%
NoBars >= 19	505	0.99%	4,956	1.99%

 

In the case of an uptrend, a Gravestone Doji has some apparent value in that the bullish trend is slowed down compared to Close = Low.

Conclusions

The statistics suggest a bullish trend reversal from a downtrend and a Gravestone Doji candlestick.  In up markets the Gravestone Doji is appears to slow down the bullishness of the trend but does not cause a reversal.   Note that sideways markets were not tested and no conclusions can be drawn for this type of market condition.