On Neck Candlestick Patterns Explained: What They Are & How To Trade Them

 

What Is an On Neck Pattern?

An on neck pattern is a 2-candlestick formation that may signal a continuation.  It is made up of a long candle moving in the direction of trend followed by a gap and a shorter candle that fails to fill the gap, closing near the high or low of the previous candle.

The on neck candlestick pattern has both bullish and bearish variations.  It is also very similar to the in neck and counterattack line patterns.  For all three patterns, the closes of the two candles create a make-or-break price level that could shape upcoming price action.

Of course, no candlestick pattern guarantees a particular outcome.  Instead, they offer clues as to what is going on in the market.

So the question is, what does an on neck really tell you?

What On Neck Patterns Mean

Like many candlestick patterns, the name itself doesn’t reveal much.

And unlike some, English speakers do not use the Japanese name for it.  The term “on neck” refers to the “neckline” created by the closes of the two candles.  If counter-trend pressure cannot hold this price band, it is implied that the trend will continue.

In trading terms:

• During the first period, price action continued the ongoing trend.
• The second period opens with a gap that is only partially filled, closing near the high or low of the previous period.

This sets the stage for continuation, as counter-trend pressure failed to close a small gap.

How To Recognize On Neck Candlestick Patterns

Traders are attracted to patterns partly because they are easy to spot.

However, it’s also easy to see things on the charts that aren’t truly there (or anticipate events that never come to fruition).  That’s one of the reasons why waiting for confirmation is so important.

Technically, an on neck pattern must:

• Begin with a long candle moving with trend that has a wick in the direction of trend, such as a belt hold candlestick
• End with a short candle moving against trend
• Have a gap after the first candle that exceeds the wick of the first candle
• Partially fill the gap created after the first period, to the wick of the first candle

In practicality though, many traders will make various exceptions.

• The first candle doesn’t necessarily have to be a long candle, as long as its body is significantly longer than the body of the second candle.
• The first candle doesn’t necessarily have to have a wick in the direction of trend, as long as there is a gap that is only partially filled by the next candle.
• The close of the second candle can be slightly above or below the wick of the first candle, as long as it does not get too near the close for the second candle.
• It can take two candles to reach the first candle’s wick, as long as the combined length of the second and third candles is significantly shorter than the body of the first candle.

Depending on who you ask, any of these standards may be more or less important.  Moreover, some of these variations may be more properly classified as other candlestick patterns, such as the in neck or counterattack lines.

Remember, identifying the continuation itself is more important than labeling the formation.  That’s not to say these standards are completely unimportant (as we’ll touch on shortly).  It’s just to say that the implications are more important than the criteria.

In other words, you need to put it into context.

Where On Necks Fit in the Chart Narrative

The markets are often characterized as a battle between the bulls and the bears.

On neck patterns show that the trending side attempted to press their advantage on candle one, continued to do so between candles, then held their ground fairly well on candle two.

On the chart, it looks like a veritable “no man’s land” between battle lines.

It might happen like this on a daily time frame:

After a strongly trending day, traders awoke the next day to a price gap.  This lead to a busy day, with those on both sides of the trend seeing opportunity.  The day was filled with give and take but ultimately price moved modestly against trend to the high or low of the day before.

In the short-term, it amounts to a mustering line.

The question traders need to ask themselves is, “Will a counter-trend surge push price back across no-man’s land or will the trend put a boot to their necks?”

To answer that question, you’ll need more than just an understanding of Japanese candlesticks and candlestick patterns.  You’ll want to analyze both within the context of greater chart patterns as well as trend and price levels.  You’ll also want to make use of your own chart markup and indicators.

Analyze the history of your preferred asset(s) with respect to on neck patterns and apply it to your own trading style.

Now, you can test (and/or stretch) the criteria we mentioned above to find the most tradeable opportunities.  For example, you may find that on necks with doji second candles play out more reliably than those without.  Or, you may find the opposite.

Here is where the story in the charts begins to come into focus.

This is what we call technical analysis.

How To Trade On Neck Patterns

Continuation points are great places to add to your position or adjust your stop loss.

On neck patterns serve as easy-to-spot signs of potential continuation that may serve as a launchpad for the next big leg up or leg down.

Generally, you can put more weight into multi-stick patterns than single candles.  They give you more information over a longer amount of time.  Still, it is considered unwise to trade based on candlestick patterns alone.  They rarely have extremely high hit rates by themselves.

You need additional points of confluence to shift the probabilities in your favor.

Some of the more important ones include:

• Volume – For continuation, you typically want to see low trading volume on counter-trend moves.  That means low volume on the second candle of an on-neck may be a good omen.
• Price Formations – Continuation patterns like the on neck tend to perform better when there is thin support or resistance in their way.  If it’s a blue sky breakout, even better.
• Matching Momentum – Oscillating indicators like the RSI or stochastics are commonly used to identify continuation by analyzing slope, percentile, and/or divergence.

The fewer such factors corroborating the continuation, the less confident you can be about it.

It would be difficult to form a comprehensive trading strategy around on-neck patterns.  There simply isn’t enough there to develop a strong edge.  Even with a great understanding of trading math, orders, psychology, risk management, options, and automation, you’d still have a hard time.

You’re much better off building your strategy around other tools then using continuation patterns as an additional point of confirmation.

Patterns like the on neck are much better idea givers than trade makers.

Other Candlestick Pattern Types

The on neck is but one of many candlestick patterns.

You’d be wise to get familiar with all of the other ones too.

• Abandoned Baby
• Breakaway
• Counterattack Lines
• Doji Star
• Engulfing
• Harami
• Harami Cross
• In Neck
• Kicking
• Ladder
• Last Engulfing
• Mat Hold
• Matching
• Meeting Lines
• Separating Lines
• Star
• Stomach
• Tasuki Gap
• Three Inside
• Three Methods
• Three Outside
• Three-Line Strike
• Tri-Star
• Tweezer
• Window

Sure, there are quite a few of them.  But don’t let that intimidate you.

It’s unnecessary to memorize all the names and criteria for every pattern.  What’s more important is to learn the principles of price action and technical analysis.

In fact, you’re free to forget all of the names and specifications as long as you can look at a group of candlesticks and understand what they are trying to tell you.

Takeaways

To review:

On necks are a type of candlestick pattern that signals a potential continuation.  While not a guarantee, their appearance may indicate that market conditions are going to remain the same.  Thus, they can help you find winning trades.

Of course, there are other candlestick patterns that you should learn about.  And even so, 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.