Since candlesticks are the basic building block of most technical analysis, the ability to read the patterns they make is a valuable trading skill. Here, we’ll go over everything you need to know to make money with stomach candlestick patterns.
First though, let’s start with a definition.
What Is a Stomach Candlestick Pattern?
A stomach pattern is a 2-candlestick formation that may signal a reversal. It consists of a large candle moving with the current trend followed by a large candle moving against the trend that opens halfway inside the body of the first and closes beyond its open.
The stomach candlestick pattern has both bearish and bullish variations, known respectively as the below the stomach and above the stomach patterns. The range between each open creates a make-or-break price band that could shape upcoming price action.
Of course, candlestick patterns do not guarantee specific outcomes. Instead, they offer clues as to what is going on in the market.
So the question is, what do stomach patterns really tell you?
What Stomach Patterns Mean
Unlike some patterns, English speakers do not use the Japanese name for this one.
The term “stomach” is an anthropomorphism based on the fact that the stomach is at about the halfway point of the human body. While this probably does make it easier to remember, it doesn’t reveal much else.
In trading terms:
- During the first period, price drove strongly in the direction of trend.
- Before the second period began, price moved in the opposite direction of the trend and made its way to the midpoint of the prior period’s open-close range.
- During the second period, price drove strongly in the opposite direction of the trend and closed beyond the open of the first period.
This sets the stage for reversal, as those on the side of trend may have bitten off more than they can chew.
How To Recognize Stomach Candlestick Patterns
Traders are attracted to patterns partly because they stand out.
However, it’s easy to see things on the charts that aren’t truly there (or anticipate events that never come to fruition). That’s the main reason you should wait for all candles to close before making decisions based on candlestick patterns.
In theory, a stomach pattern must:
- Begin with a long candle moving with pre-existing trend.
- End with a long candle that 1) opens halfway inside the body of the first, 2) moves against trend, and 3) closes beyond the open of the first.
In practicality, many traders will make some exceptions.
- The first candle doesn’t necessarily have to be a long candle, as long as it is not a short line candle (ie. spinning top).
- The second candle doesn’t necessarily have to be a long candle as long as its other criteria are met.
- The second candle doesn’t have to open exactly in line with the middle of the first candle, as long as it has a significant inside open.
- It can take multiple candles to close beyond the original open, as long as none of the subsequent candles breach the midpoint of the first candle.
Depending on who you ask, any of these standards may be more or less important. Technically, it would be more accurate to classify some of these variants as a different candlestick reversal pattern.
This is okay, as the implication means more than the classification. And similar patterns tend to have similar implications.
That’s not to say that these standards are altogether inconsequential (as we’ll elaborate on soon). You should definitely consider some non-negotiable, like the midpoint inside open or the direction of the candles in relation to trend. Just keep in mind that context trumps criteria.
Ultimately, it’s up to you to decide how seriously to take each guideline.
After all, the goal of candlestick pattern analysis is to interpret underlying price action (not just label patterns correctly).
To this end, you need to understand where they fit.
Where Stomach Patterns Fit in the Chart Narrative
The markets are often characterized as a battle between the bulls and the bears.
Stomach patterns show that those trading with trend pressed their advantage on candle one, lost the momentum between candles one and two, then surrendered completely by the end of candle two.
On the chart, it looks like a regurgitation of trend.
The first day saw a powerful trending move, leading many to expect more of the same. Yet traders awoke the next morning to a dramatic inside open, as half of the previous day’s action was canceled out overnight. This led trend-side traders to back off, allowing countertrend players to push price back beyond the open of the first day.
Over the coming days, the range between the open of each candle is likely to become a crucial decision zone. If those looking for reversal can defend this price band, they have a better chance at making the trend change stick.
(This is only a hypothetical illustration, as a stomach pattern could represent a number of real-world scenarios.)
In the short-term, it amounts to a counter-trend gut-punch.
The question traders need to ask themselves is,
“Is this just a hiccup in the overall trend or will it lead to a sustained reversal?”
To answer that question, you’ll need more than just an understanding of Japanese candlesticks and candlestick patterns. You’ll want to evaluate both within the context of longer-term chart patterns as well as trend and price levels. You’ll also want to make use of your own chart markup and indicators.
Explore the history of your preferred asset(s) with respect to stomach patterns and apply your findings to your own trading style.
Now, you can test (and/or stretch) the criteria we mentioned earlier to identify the best trade setups. For instance, you may find that stomachs with larger second candles perform more reliably than those with smaller ones. Or, you may find something else entirely.
This is the kind of technical analysis that brings the story in the charts into full focus.
How To Trade Stomach Patterns
Reversal points are great places to enter or exit trades, especially when you catch them early enough.
Stomach candlestick patterns serve as easy-to-spot signs of potential reversal and may even lead to cycle-defining tops or bottoms. Generally, you can assign greater weight to multi-stick patterns than single candles because they give you more information over a longer duration.
However, there are a few things you should know about trading candlestick patterns.
First and foremost, their hit rates rarely exceed 70%. According to Bulkowski’s Encyclopedia of Candlestick Patterns, above the stomachs have a 66% hit rate while below the stomachs have a 60% hit rate. Although these numbers are pretty good compared to most candlestick patterns, they are far from a “sure thing.”
In addition, candlestick patterns do not have standardized price targets or measured moves like chart patterns do. This can make it difficult to decide when to get out of your trade or how to manage your stop loss.
Moreover, failed reversal patterns often lead to continuation or consolidation. Therefore, you need additional points of confirmation to increase your odds of success.
Some such factors include:
- Volume – Reversals are often accompanied by elevated trading volume. For stomach patterns, you want to see a spike on the second candle (or just after).
- Price Formations – Reversal patterns that form on the right side of important price levels or trend lines are often more reliable. Always be aware of support and resistance!
- Oscillator Shift – Oscillating indicators like the RSI or stochastics are commonly used to identify reversals by analyzing slope, percentile, and/or divergence.
The more corroborating elements are present, the more confident you can be about a stomach reversal signal.
Even so, it would be difficult to form a successful trading strategy centered around any given candlestick pattern. There simply isn’t enough there to develop a strong edge. Even with a great understanding of trading math, order execution, market psychology, risk management, options, and automation, you’d still have a hard time.
In essence, stomach patterns are more useful idea givers than trade makers.
Better yet, you’ll probably find more success building your strategy around other tools then using candlestick patterns as the final point of confirmation.
Other Candlestick Pattern Types
The stomach is but one of many candlestick patterns.
And while learning them all is not a prerequisite for successful trading, you’d certainly benefit from getting familiar with other candlestick pattern types.
They can be categorized in several ways.
The most straightforward way may be by the number of candlesticks (ie. 2-candlestick, 3-candlestick, 5-candlestick, etc.)
More helpful though, you can group them by price direction or signal type. That is, they can be bullish or bearish and/or imply reversal or continuation. Finally, you can multiply these designations together to separate them into bullish reversal, bearish reversal, bullish continuation, and bearish continuation categories.
On the other hand, you might just tackle them in alphabetical order:
- Abandoned Baby
- Breakaway
- Counterattack Lines
- Doji Star
- Engulfing
- Harami
- Harami Cross
- In Neck
- Kicking
- Ladder
- Last Engulfing
- Mat Hold
- Matching
- Meeting Lines
- On Neck
- Separating Lines
- Star
- Tasuki Gap
- Three Inside
- Three Methods
- Three Outside
- Three-Line Strike
- Tri-Star
- Tweezer
- Window
Sure, there are quite a few. But don’t let that intimidate you.
It’s unnecessary to memorize the name and criteria of every single pattern. The key is to learn the principles of price action and technical analysis.
In fact, you’re free to forget all of their names and specifications as long as you can look at a group of candlesticks and understand what they are trying to tell you. It’s just that the more of them you learn about, the easier this will become.
So take the time to study at least a few more of them.
Takeaways
To review:
Stomachs are a type of candlestick pattern that signal a potential reversal. While not a guarantee, their appearance may indicate that market conditions are changing. Thus, they can help you find winning trades.
Of course, there are other candlestick patterns that you should learn about. Still, the ability to recognize patterns is not enough to trade successfully on its own.
Nonetheless, you’ve now added one more tool to your toolkit.
Have questions or more information to add? Contribute to the conversation in the comments below! Or, if you know someone who could benefit from this post, share it with them. You can also check out our Candlestick Patterns Guide to improve your candlestick analysis skills.