To begin, let us define what a doji is. The word doji comes from an ancient Japanese word that basically means knife. Essentially, a doji is simply any candle where the opening price is equal to, or very close to equal to the closing price. This results in a very narrow real body, that does in fact look like a knife if you use your imagination. This shows that the bulls and bears have battled it out, and at the end of the day, the result was a draw between the two.
Doji are more important after long up trends or downtrends. But contrary to popular belief, they are not a particularly bullish or bearish signals. They just mean that the bulls and bears are at equal force, and the trend may reverse or trend sideways. In other words, doji represent a tie between bulls and bears, and not a victory.
The gravestone doji is a stronger signal. Ideally, the gravestone doji will appear after a long uptrend, and the chart will be overbought in terms of RSI. The bulls, who are in control, push the price significantly higher in mid session. Then, the bears come out, and begin dominating the bulls, and close the price very near the opening. This results in a long upper shadow, and small real body. Optimally, there is no lower shadow. Please refer to the chart below for an example of this.
Furthermore, this candle represents that the bulls have lost control, and the up trend is in serious jeopardy. In the above weekly chart of the XAU, both these gravestone doji forecasted massive declines in the index. Remember, candle patterns work for any time frame, but the patterns that appear on longer term charts are usually more powerful as this weekly chart demonstrates.
