In the realm of financial markets, it is crucial to utilize analytical tools that can facilitate successful investments and profitable trades. The On Neck candlestick pattern represents one of such valuable tools that many traders and analysts employ in their strategies.
The pattern is characterized by a specific structure, consisting of a bearish candlestick, followed by a smaller bullish candlestick with a body that does not cross the closing price of the previous one.
By examining this pattern, experts can identify significant signals that may indicate a bearish or bullish trend reversal or continuation. The ability to determine and interpret the On Neck pattern correctly is a crucial skill for traders seeking to succeed in evolving and volatile financial markets.
The article covers the following subjects:
Major Takeaways
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The On Neck candlestick pattern is a two-candlestick pattern formed by a high-volume red candlestick and a small green candlestick. On the price chart, the formation suggests a continuation of a bearish trend. However, depending on the market situation, the pattern can also indicate a trend reversal, assuming the current trend is waning and a correction may be underway.
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The On Neck candlestick pattern consists of two candlesticks. The second bullish candlestick closes below the closing price of the previous bearish candlestick, where the neckline is located. This level is a critical component of the pattern.
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Traders can use this pattern to identify entry points, taking positions against the prevailing market trend. The trading strategy involves placing protective stop-loss orders below the neckline to mitigate potential losses, confirming the signal by trading volume and other technical indicators.
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Stop-loss levels are typically established just below or above the point where the neckline breakout occurs, depending on the direction of the trade. The On Neck pattern is typically observed on short- to medium-term time frames, such as 1-hour or 4-hour candlestick charts, enabling traders to respond promptly to market fluctuations.
What Is On Neck Pattern?
The On Neck candlestick pattern is a valuable tool for Forex traders, offering a crucial perspective when analyzing Japanese candlesticks. This pattern is classified as a reversal pattern formed in bearish trends.
On Neck is a two-candlestick pattern: the first tall down candlestick, indicating the continuation of the downtrend, and the second candle is a shorter bullish candlestick, closing below the closing level of the first candle. The pattern can serve as an indicator of a potential slowdown in an existing trend or its imminent end.
However, the On Neck pattern alone does not always provide a clear signal of a trend reversal; therefore, it is essential to consider additional factors, such as trading volume and other technical indicators, before making a trading decision. To ensure the most accurate forecasts, it is better to use the On Neck pattern in conjunction with other technical indicators.
On Neck Pattern Formation
The structure and formation of the pattern on the chart include the following criteria:
Two candlesticks. The pattern consists of a long candlestick opened in the direction of the trend and a small candlestick having the opposite direction.
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The long candlestick indicates strong momentum in the direction of the prevailing trend.
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The short candlestick opens just below the closing level of the previous candlestick, gapping up or down slightly, indicating a pause in the movement.
Prevailing trend. The pattern is formed during a clearly defined downtrend.
Trading volume. It is frequently accompanied by an increase in trading volume on the first candlestick, which confirms that the movement is strong.
Market psychology. The second candlestick suggests market participants are experiencing indecision and are unable to reverse the trend.
Trend continuation. The pattern suggests a continuation of the bearish trend, as there has been no significant pullback.
Requires additional tools. The pattern should be confirmed by other technical indicators and factors.
What Does the Pattern Tell Traders?
The On-Neck candlestick pattern is a reliable indicator of trend continuation, especially in a downtrend. The second bullish candlestick should not close above the body of the preceding bearish candle, indicating that selling pressure remains.
The On Neck pattern indicates a temporary halt in market dynamic fluctuations. However, the absence of new bullish momentum suggests that the price is likely to continue declining. Analysts often consider this pattern a sign of continued bearish sentiment. Meanwhile, the pattern should be confirmed by other technical indicators.
How to Identify a On Neck pattern
The On Neck pattern can be identified following these steps:
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Analyze the price movement. The On Neck pattern emerges during or following a downtrend, comprising two candlesticks: the first is long and black (red), while the second is small and white (green).
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Pay attention to the features of the second candlestick. It should open below the previous candlestick’s closing level and have a small body, closing just below the first candlestick’s body.
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Evaluate trading volume. In some cases, low trading volume implies a weak signal generated by the pattern.
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Confirm a new trend. Once the pattern emerges, a continuation of the downtrend is anticipated.
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Use additional indicators and candlestick patterns. Their signals can confirm the pattern.
This chart illustrates a trend reversal following the On Neck pattern.
The chart below displays a trend continuation after the On Neck pattern.
Example
Let’s analyze some examples of the On Neck formation on charts of various assets.
On the daily chart, the NZDCAD pair was declining. In particular, the strong bearish candle of the On Neck pattern, during the formation of which bulls managed to regain some ground.
The following small bullish candlestick opened lower, but buyers failed to maintain their success throughout the entire trading session. Nevertheless, the long lower wick of the red candlestick showed the weakness of sellers, and the On Neck pattern signaled an upward price reversal.
The daily chart of the Nasdaq-100 index can serve as an example of a bearish trend continuation. On Neck patterns featuring large red candlesticks and small green ones demonstrated the weakness of buyers in the market, pointing to the strengthening of bearish sentiment.
How to Trade On Neck Pattern
Trading using the On Neck pattern necessitates a thorough analysis of market movements and the application of market signals. The pattern allows traders to interpret and predict future price movements. Once you learn to recognize the pattern’s features, you will be able to develop profitable trading strategies and make informed trading decisions.
Trading On Neck Pattern Using MACD and RSI to Enhance Confirmation
This trading strategy involves confirming the On Neck pattern using the MACD and RSI technical indicators. The MACD indicator provides a means to gauge the strength and direction of the trend, while the RSI helps to determine the overbought and oversold zones. Let’s analyze Intel Corp.‘s weekly chart.
The price formed a Bearish Marubozu candlestick pattern at the resistance level of 68.27. After that, a short bullish candlestick formation gapped down. Thus, the On Neck pattern has taken its shape, as the closing price of the second candlestick did not exceed the closing price of the first one.
At this point, the MACD indicator values crossed the zero boundary from above, sliding into the negative zone. RSI values also turned downward from the overbought zone. As a result, the indicators confirmed that the asset was under strong selling pressure.
In this scenario, a short position could have been opened after the On Neck pattern once it was confirmed at 56.30. The bearish target could be set at the support level of 43.67. A stop-loss order should be placed slightly above the neckline at 60.99.
Trading On Neck Pattern Using Candlestick Patterns to Enhance Confirmation
This trading method involves the use of the On Neck pattern in combination with other candlestick patterns. Let’s examine a daily chart of Tesla, Inc. shares to illustrate this approach.
The TSLA price consolidated in a sideways channel between 12.09 and 14.83 for an extended period before developing a bullish trend. An On Neck pattern appeared near the key support level of 12.09, pointing to a looming upward reversal. Morning Star and Inverted Hammer candlestick patterns confirmed the reversal.
The gap after the Inverted Hammer pattern, with the subsequent green candlestick, gave the final signal to open a long position.
Targets could be set at the key resistance levels of 14.83, 16.07, and 17.33. A stop-loss order should be placed below the support level of 11.89.
Combined Trading Strategy with On Neck Pattern Confirmation
The combined trading strategy encompasses technical indicators and various candlestick and chart patterns, in conjunction with the On Neck pattern. Let’s examine an example of such a trading strategy on the four-hour chart of the US dollar index (USDX).
The On-Neck pattern is formed in the middle of a larger chart pattern, the Falling Wedge, signaling a potential upward reversal. Prior to the price crossing the upper boundary of the Wedge pattern, another reversal pattern, the Hammer, emerged on the chart. In addition, the MACD values breached the zero boundary from below, continuing to rise in the positive zone.
The RSI also began to increase, generating buy signals. According to the OBV indicator, trading volume began to increase gradually, along with tick volume, suggesting that bullish pressure intensified.
Once the On Neck pattern was confirmed, it would have been possible to open a long position after a breakout of the Falling Wedge pattern at 100.40, with targets in the 101.82–103.01 range. Meanwhile, a stop-loss order could be placed slightly below the support level of 99.82.
On Neck vs In Neck Pattern
In this section, we will analyze and compare the On Neck and In-Neck patterns.
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On Neck |
In-Neck |
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It appears in a downtrend and is considered a bearish continuation pattern. |
It appears in a downtrend and is a bearish trend continuation pattern. |
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The first long bearish candlestick indicates selling pressure. |
The first bearish candlestick is large, pointing to increased selling pressure. |
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The following candlestick, usually bullish, has a small body, closing slightly below the previous candlestick. |
The second candlestick opens below the close of the previous candlestick and closes at or slightly above the close of the first candlestick. |
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Depending on the market conditions, it may indicate a potential trend reversal or an upward correction. |
It assumes that bulls fail to reverse the downtrend and that bullish sentiment fades rapidly, thereby reinforcing the bearish trend. |
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In some cases, it may indicate a change from a bearish to a bullish trend. |
Pros and Cons
Advantages of the On Neck pattern:
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Versatility. It can be applied to different financial markets and time frames.
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Easy to recognize. It is easily identified even by novice traders.
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Compelling visualization. The pattern is often accompanied by noticeable trading volume changes that can be analyzed.
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Good risk/reward ratio. The pattern usually gives clear entry and exit points.
Disadvantages of the On Neck pattern:
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False signals. It can generate false signals, especially in volatile market conditions.
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Requires confirmation. The pattern should be validated with technical indicators or other candlestick patterns.
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Dependence on the market situation. The pattern’s effectiveness can vary significantly depending on market conditions.
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Limited applicability. It does not suit all trading strategies and styles.
Conclusion
The On Neck candlestick pattern is a critical technical analysis tool that empowers traders with pivotal signals for decision-making in the currency and stock markets. The pattern serves as an indicator of an impending trend reversal or continuation.
By combining it with other technical indicators and analyzing the general context of market conditions, traders can increase the accuracy of forecasts and minimize risks. However, as with any analytical tool, the On Neck candlestick pattern necessitates experience, patience, and meticulous examination of historical data. You can learn to determine the pattern from a hands-on perspective by opening a demo account with LiteFinance.
On Neck Candlestick Pattern FAQs
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