The On-neck candlestick pattern is a twin candlestick pattern. A pair of opposite-colored candles create this pattern. It is found during a bear trend. We find a red candle which is followed by a green candle in this pattern.
What Does On-neck Mean?
On neck means on the neckline. In this pattern, two candles form a neckline. On neck is a metaphor. This candlestick pattern that appears on the chart looks like two candles are catching one another’s neck. I feel this pattern has been aptly named.
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Why This Candlestick Pattern is Named On-Neck?
The two candlesticks that form this pattern appear to be one on another’s neck. There is a red candle which appears first. Another green candle after that closes on the neckline. The neckline is formed where the two candles finish after closing. In the picture below we can see how the two candles are attached to the imaginary neckline.
Though in actual charts, the on neck candlestick pattern may not exactly look like what appeared in the diagram, the chart pattern should be similar. The consecutive two candlesticks must close at the same price or almost the same price.
What is On-neck Candlestick Pattern? – The Definition
The on-neck pattern is found in the bear trend. When the market is coming down, after a red candle, there appears a green candle which is closing at the same price as the previous red candle. The size of the candles or the size of their wicks is not important here.
This pattern is a continuation pattern. The continuation pattern appears when the trend strength shows that the prevailing trend is going to continue.
In the case of on neck candlestick patterns, they appear in bearish trends. The patterns confirm that the bearish trend is going to continue. So, traders who are already riding the bearish wave can be assured of their bearish positions.
How The On-neck Pattern is Formed?
The on-neck pattern forms during the bearish trend. There are some preconditions for these patterns to remain valid.
Firstly, there has to be a prevailing bearish trend. A large bearish candlestick appears somewhere during the trend, but not at any end. The first candle is a large bearish candle or a red candle.
The large red candlestick is closely followed by the bullish or green candlestick.
The bullish candlestick need not be a large one. Rather a smaller green candlestick is more useful.
The bullish candlestick must close near the previous bearish candlestick’s closing price. This is how the pattern is formed. The closing price of the red candle and succeeding green candle should be near or the same.
And, we must see that the pattern will only be formed when the neckline is not broken. The on neck pattern is only valid if only the neckline is not breached.
Hence, under no condition, the second candle should close above the neckline. So the closing price of the second candle must be equal to or below the closing price of the first candle. Also, the closing price of the two candlesticks should be equal or nearly equal.
Thus, we can say, a neckline must form in an on neck pattern. To form the neckline, the red candle and the green candle must close at the same or approximately the same price. But the closing price of the second candle must not be greater than that of the first candle.
What Does On-neck Candlestick Pattern Indicate?
The on-neck candle pattern is found in a bearish trend. This is a continuation pattern. This pattern affirms the continuation of the prevailing bearish trend.
The prevailing trend was bearish when the candlestick pattern appeared. The on neck pattern appeared somewhere in the bearish trend. The trader who already has sold the stock seeing the bearish pattern would prefer to see this pattern.
This is a comparatively stronger continuation pattern than other similar patterns. This pattern confirms that bears are going to be in control for a while.
Whatever bulls are there are not strong. The second candle shows that they could not regain control even after the bullish candle. The small body of the green candle and its closing price affirms that.
In the second candle, the bears opened with a gap-down price in an attempt to take the price further down. But the bulls resisted strongly. Bulls fought and fought hard all through the trading period.
The bulls were trying to take control of the situation here. Hence, even after opening with a gap down price, the bears could not take the price further down.
The primary thrust applied by the bulls, made the bears lose temporarily. The stock was being bought at consecutive higher prices. Whatever equities were offered for sale, all were bought at higher and higher prices.
Surprised by the action of the bulls, the bears were taken aback temporarily. But that initial thrust was not enough. The initial thrust by the bulls pushed the stock price higher. Bulls were buying strongly. At this moment bears were little active and gathering strength.
At the end of the day, bears came back vehemently and started to sell the stock. With the sharp rise in supply, the stock price started to come down. This time, bulls could not cope with the high selling pressure and they lost ground.
This fall in price continued till the end of the day, resulting in the closing price being equal to the closing price of the first candle or a little lower. This price action formed the desired neckline of the on neck pattern. The bulls’ defeat on the last leg of the trading day ensured that the bears would control the situation henceforth and the bearish trend would continue further.
The bearish trend confirmation could be obtained from the third candle. The third candle would be a bearish one and maybe large to confirm that the bears were in control.
How to Identify an On-neck Candlestick Pattern?
It is not easy to identify the on neck pattern. The neckline formation is important in this case. Therefore finding this imaginary neckline is very important which may be hard for a new entrant. Seasoned traders would identify it.
Once the neckline is formed, a third candle will confirm the bearish trend. The confirmation candle is easily identifiable.
In this on-neck pattern, there will be a small green candle between two large red candles. The green candle must close on the neckline. This pattern, in my opinion, is not very hard to find as this is a visual pattern. Sharp eyes would identify this pattern at a close look at the candlestick chart.
How to Trade with On-neck Candlestick Pattern?
This pattern is a continuation pattern. A continuation pattern is not like other patterns which give trading signals. A continuation pattern confirms the continuation of the prevailing trend. A trader riding the bearing wave gets assured the bearing trend is going to continue.
If we look at the chart above, we can see that the bearish trend continues for a while with small ups and downs.
If someone wants a fresh trade, the trader must sell below the second candle and stay put. The stop loss would be the last swing high (that can be quite a big stop loss). The exit price will depend on the trader’s discretion.
Difference Between On-neck and In-neck Candlestick Patterns
Both the on-neck and in-neck pattern is a continuation patterns. But in neck pattern is a thrusting pattern. In this pattern, the candlestick closes above the closing price of the first candle. In the in neck pattern, the second candle closes inside the neckline, not at the neckline.
The on-neck pattern gives a stronger continuation signal than the in-neck pattern. In the case of in neck candlestick patterns, the bearish trend may be a feeble trend and may not continue much longer.
Accuracy of the On-neck Candlestick Patterns
The on-neck pattern is fairly accurate. It gives a strong signal that the prevailing bearish trend is going to continue. It has a success rate of 33.8%. But the profit is somewhat limited. It has a low percentage of reaching a profit target in a 2:1 risk-reward ratio.
Limitations of On-Neck Pattern
Continuation patterns are for trend confirmation. So it is best to use it for trend continuation signal. Therefore big trades, that are given by the reversal patterns, can not be had from signals given by these patterns. This pattern does not indicate how long the bearish trade is going to continue or how far the stock price is going to fall. A trader should always understand that.
The on neck pattern shows good accuracy in forecasting the trend continuation. But it does not say how far the bearish trend is going to continue. Hence, a trader must keep in mind the nature of this pattern. A trader who traders the on neck pattern, should not always have high hopes of making a big profit every time. The limitation of this pattern must be kept in mind.