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

 

What Is a Bearish In Neck Pattern?

A bearish in neck pattern is a 2-candlestick formation that may signal a bearish continuation.  It may appear in a downtrend and is made up of a large bearish candle followed by a gap down and smaller bullish candle that fills the gap and closes near the close of the first candle.

It is the bearish version of the in neck pattern, making it the opposite of the bullish in neck.  It is also very similar to the bearish on neck and bullish counterattack lines patterns in that 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 in neck really tell you?

What Bearish In 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 “in neck” refers to the “neckline” created by the closes of the two candles.  If the bulls cannot hold this line, it is implied that the downtrend will continue.

In trading terms:

• During the first period, price continued the pre-existing downtrend.
• The second period opened with a modest gap down but price moved back up, filled the gap, and closed at the same price as the first period.

This sets the stage for bearish continuation, as the bulls struggled to fill a small gap.

How To Recognize Bearish In 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, a bearish in neck pattern must:

• Appear during a downtrend
• Begin with a bearish long candle
• Have a gap down after the first candle
• End with a bullish candle that fills the gap and closes even with the bottom of the first candle’s body

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 longer than the body of the second candle.
• The close of the second candle can be slightly above or below the close of the first candle.
• It can take two candles to fill the gap, as long as the combined body length of the second and third candles is shorter than the length of the first.

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 bearish on neck or bullish 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 Bearish In Necks Fit in the Chart Narrative

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

Bearish in neck patterns show that the bears attempted to press their advantage on candle one and between candles one and two, but then allowed some reprieve by the end of candle two.

On the chart, it looks like a pause in the action.

It might happen like this on a daily time frame:

The first day saw price action remain true to form, continuing on a downward trajectory.  Even once the market closed for the day, price couldn’t help but sink lower.  Once the second day rolled around, the gap lead some of the bears to believe they might have gotten ahead of themselves.  Anticipating a bullish rally, they backed off, which created a self-fulfilling prophecy that allowed price to float back up to the close of the first day.

From here, the bulls know they must hold the newly formed neckline if they have any chance at reversing the trend.

In the short-term, it amounts to a rallying point.

The question traders need to ask themselves is, “Will the bulls be able to hold the line or will the bears 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 in 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 bearish in necks perform more reliably when the second candle has a long lower wick.  Or, you may find something else entirely.

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

This is what we call technical analysis.

How To Trade Bearish In Neck Patterns

Bearish continuation points are great places to add to your short position or move your stop loss down.

Bearish in neck patterns serve as easy-to-spot signs of potential bearish continuation that may serve as a launch point for the next big 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 bearish continuation, you typically want to see low trading volume on bullish moves.  That means low volume on the second candle of a bearish in-neck may be a good omen.
• Price Formations – Bearish continuation patterns like the bearish in neck tend to perform better when there is thin (or non-existent) support in their way.  The further below and weaker the 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 in-neck patterns (whether bullish or bearish).  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 in neck are much better idea givers than trade makers.

Other Candlestick Pattern Types

The bearish in neck is but one of many candlestick patterns.

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

• Abandoned Baby – Bearish | Bullish
• Breakaway – Bearish | Bullish
• Counterattack Lines – Bearish | Bullish
• Doji Star – Evening | Morning
• Engulfing – Bearish | Bullish
• Harami – Bearish | Bullish
• Harami Cross – Bearish | Bullish
• Kicking – Down | Up
• Ladder – Top | Bottom
• Last Engulfing – Top | Bottom
• Mat Hold – Bearish | Bullish
• Matching – High | Low
• Meeting Lines – Bearish | Bullish
• On Neck – Bearish | Bullish
• Separating Lines – Bearish | Bullish
• Star – Evening | Morning
• Stomach – Below | Above
• Tasuki Gap – Downside | Upside
• Three Inside – Down | Up
• Three Methods – Falling | Rising
• Three Outside – Down | Up
• Three-Line Strike – Bearish | Bullish
• Tri-Star – Bearish | Bullish
• Tweezer – Top | Bottom
• Window – Falling | Rising

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:

Bearish on necks are a type of candlestick pattern that signals a potential bearish 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.