Stomach Patterns are made up of two candlesticks that represent trend reversals.
This dual candlestick pattern can be found at levels of uptrend or downtrend. The first candle indicates that a trend is continuing. The second candle signals a trend reversal, with a body above or below the midway of the previous candle’s body.
Types of Stomach Pattern
There are two types of Stomach Patterns:
- Above the Stomach
- Below the Stomach
Above the Stomach Candlestick Pattern –
Above the Stomach is a two candlestick pattern that indicates a bullish reversal. This pattern frequently appears after a prolonged decline.
How to Spot?
- It is made up of two candlestick formations.
- The first one is red, whereas the second is green.
- The second candle’s body should be near or above the center of the first candle’s body.
- The open price of the second candle is above or near the level of the midpoint of the first candle’s real body. And the closing price of the second candle engulfs the first candle’s body, indicating bullish momentum.
Interpretation
The appearance of this pattern in a downtrend suggests a high probability of a bullish reversal signal, which traders can use as a buying opportunity.
How to Trade?
Long Entry – Traders should place a buy entry after the complete formation of this dual candlestick pattern.
Risk Management – Stop Loss should be placed below the body or the wick of the first candlestick.
Price Target – The level of taking profit varies from trader to trader. We advise using 1.5 or 2 times the stop loss threshold. For example, if you risk $2 for every trade, your price goal should be between $3 and $4.
Identification Guideline Table
| Attribute | Observation |
| Appearance | Downtrend |
| Candlestick Pattern | Dual |
| Formation | Bearish candlestick, followed by a bullish candlestick. The body of the bullish candlestick would be above the midpoint of the previous candle. |
Below the Stomach Candlestick Pattern
BTS is a dual candlestick pattern that appears during an uptrend and suggests a bearish reversal.
How to Spot?
- Below the stomach, just like above the stomach, is made up of two candlestick formations.
- The first candle is long and bullish (green), whereas the second candle is long and bearish (red).
- The body of the second candle is close to or below the midpoint of the previous candlestick.
- The open price of the second candle is below or near the level of the midpoint of the first candle’s real body. And the closing price of the second candle engulfs the first candle’s body, signaling bearish momentum.
Interpretation
Below the stomach pattern indicates a market bearish reversal after an uptrend and can be used to identify a short selling opportunity.
How to Trade using Below the Stomach Candlestick Pattern?
Long Entry – Formation of the pattern signals short selling entry.
Risk Management – The first candlestick’s top body or wick should be used as a stop loss placement
Price Target – Take profit level would be twice the risk.
Identification Guideline Table
| Attribute | Observation |
| Appearance | Uptrend |
| Candlestick Pattern | Dual |
| Formation | Bullish candlestick, followed by a bearish candlestick. The body of the bearish candlestick would be below the midpoint of the previous candle. |
Things to Consider
Stomach patterns near technical tools like support and resistance levels, Fibonacci levels, and trend lines, would signal a high probability trading setup.
The larger the bodies, the stronger the patterns and the more effectively they act in favor.
Technical indicators such as volume, moving average, or RSI should be utilized to gauge market sentiments for additional confluence.
Entries should be placed once the stomach pattern has been completely formed.
Conclusion
- Stomach candlestick patterns are dual candlestick patterns that traders use to identify trend reversals.
- A bullish reversal indication is shown Below the Stomach candlestick pattern.
- Similarly, a bearish reversal indication is shown by the Above the Stomach candlestick pattern.
- Aligning these patterns with technical tools and indicators provides better market entry points.
- To avoid significant drawdowns, use stop loss as a risk management strategy.
