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Technical analysis in stock trading relies heavily on chart patterns and candlestick formations are among the most insightful tools used by traders. One such pattern is On-Neck Candlestick Pattern, which usually appears during a downtrend. This pattern can provide clues about possible trend continuation, helping traders fine tune their entry or exit strategies.
Recognizing such patterns early can be important for making informed trading decisions. While not as widely discussed as some other candlestick formations, on-neck pattern holds value for those who follow price action trading and seek confirmation of ongoing downtrends.
In this blog, we’ll walk you through what is On-Neck Candlestick Pattern, how to identify On-Neck Candlestick Pattern and how it works in technical analysis.
What is On-Neck Candlestick Pattern?
On-Neck Candlestick Pattern is defined as a two candlestick formation that occurs during a downtrend, signaling a possible continuation of bearish momentum. It is characterized by a long bearish (black or red) candle followed by a smaller bullish (white or green) candle.
The second candle opens lower than the close of the first candle (gap down) and closes at or very near the low of the first candle, forming a horizontal line known as the “neckline.” This neckline is a key visual feature, giving the pattern its name. This pattern is primarily considered a bearish continuation signal, suggesting that the downward trend is likely to persist.
Here’s how to trade it step by step:
- Identify the Downtrend
Before you act on on-neck pattern, make sure the asset is already in a clear downtrend. This pattern is most effective when it appears after a series of falling prices.
- Spot the Pattern
Look for:
- A long bearish candle (red or black).
- Followed by a smaller bullish candle (green or white) that opens lower but closes near or just above the previous candle’s low.
This second candle should not break above the body of the first candle.
- Wait for Confirmation
Don’t enter the trade immediately after the pattern appears. Wait for the next candle to break below the low of the on-neck pattern. This confirms selling pressure is still strong.
- Check for Volume and Indicators
Look at trading volume, a spike during the breakdown adds strength to the signal. Also, confirm with indicators like:
- RSI to check for overbought/oversold conditions.
- MACD to confirm bearish momentum.
- Moving averages to check the trend direction.
- Enter the Trade
Once confirmation occurs, trader enters a short position or considers exiting a long trade to limit losses.
- Set Stop Loss and Target
- Stop loss: Just above the high of the bullish candle in the on neck pattern.
- Target: Use the next support level, or apply a risk reward ratio (like 1:2) to determine a suitable price target.
Pros and Cons of On Neck Pattern
Like any trading pattern, on-neck candlestick pattern has its strengths and weaknesses. Understanding these can help traders use it more effectively and avoid common mistakes.
- Advantages of On-Neck Pattern
- Works Across Markets and Timeframes: This pattern can be used in stocks, forex, commodities and more. It also works well on different timeframes from intraday charts to daily or weekly setups.
- Easy to Spot: Even beginners can identify this pattern without complex tools. Its visual structure makes it simple to recognize.
- Backed by Volume Clues: This pattern often comes with a visible increase or shift in trading volume which helps traders confirm if the signal is reliable.
- Clear Entry and Exit Points: On-neck pattern gives a defined setup, helping traders plan where to enter and where to place stop-loss and take profit levels, resulting in a better risk to reward ratio.
- Disadvantages of On-Neck Pattern
- Can Give False Signals: This pattern might trigger incorrect entries in choppy or highly volatile markets, leading to losses.
- Needs Confirmation: Relying on this pattern alone can be risky. It's best to use it with other technical indicators like RSI, MACD or moving averages to confirm the trend.
- Not Always Effective in All Markets: Performance of this pattern can vary depending on market trends, news or overall sentiment. It works best in strong downtrends.
- Doesn’t Fit Every Strategy: This is a bearish continuation pattern so it might not be useful for traders who focus on reversal strategies or range-bound trading.
On-Neck vs In-Neck Pattern
Let’s break down the key differences between On-Neck and In-Neck candlestick patterns.
| Feature | On-Neck Pattern | In-Neck Pattern |
|---|---|---|
|
Market Trend |
Appears during a downtrend |
Also appears during a downtrend |
|
Candle Formation |
A big red (bearish) candle is followed by a small green (bullish) candle that closes at or slightly below the previous red candle’s low. |
A big red candle is followed by a small green candle that closes slightly above the previous red candle’s low. |
|
Meaning |
Suggests that sellers are still in control and the downtrend may continue. |
Suggests temporary buying, but selling pressure is likely to resume. |
|
Confirmation Needed |
Yes, volume and other bearish signals help confirm the trend continuation. |
Yes, needs confirmation through indicators or chart patterns. |
|
How Traders Use It |
To confirm bearish momentum and plan short positions. |
Also used to support a bearish outlook but less aggressive than On-Neck. |
|
Strength of Signal |
Considered a stronger bearish signal |
Considered a weaker bearish signal compared to On-Neck |
|
Risk Level |
Slightly higher confidence for traders if confirmed |
Requires more caution due to weaker signal strength |
Final Words
On-neck pattern is a reliable tool for identifying bearish continuation. While it may appear like a reversal at first glance, it confirms that the downtrend remains strong. For better accuracy, combine it with volume analysis and other technical indicators. Using this pattern within a broader strategy, with proper risk management can improve trade timing and decision making. On-neck pattern can further enhance entry and exit precision.
Frequently Asked Questions
In which market trend does on-neck pattern typically occur?
On-neck candlestick pattern usually forms during a downtrend and signals the bearish momentum is likely to continue.
What is the role of volume in confirming on-neck candlestick pattern?
High trading volume during the formation of the bearish candle can strengthen the signal, confirming strong selling pressure and increasing the reliability of the pattern.
What indicators can be used along with on-neck pattern?
To confirm signals, traders often use on-neck pattern alongside technical indicators like RSI, MACD and moving averages.
How can on-neck pattern help with risk management?
Once this pattern is identified, traders can place stop loss orders more effectively, minimizing potential losses while riding the continuation of the trend.
What does on-neck candlestick pattern suggest about market psychology?
It reflects a brief attempt by buyers to push prices up but this enthusiasm fades quickly, allowing sellers to regain control, supporting the bearish trend.
Happy investing and thank you for reading!
Disclaimer:
This website content is only for educational purposes, not investment advice. Before making any investment, it’s important to do your own research and be fully informed. Investing in the stock market includes risks, and you should carefully read the Risk Disclosure documents before proceeding. Please remember that past performance doesn’t guarantee future results, and due to market fluctuations, your investment goals may not always be achieved.
