On Neck Candle Pattern Explained

On Neck Candle Pattern Explained
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An On Neck Candle Pattern is a candlestick chart pattern which signals a potential continuation in the market. In this article we will show you how to identify it in the right market condition.

The On Neck Candle Pattern is a Bearish candle pattern which signals a potential continuation when forming in a downtrend.

On Neck Candle Pattern Criteria:

  • The first candle of this two candlestick pattern is a red (bearish) candle with a strong real body.
  • The candle forms in a down-trend.
  • The second candle’s price opens below the prior session’s low price (that is, below the low of the lower shadow). However, by the end of that candle’s session, the market closes near the low of the prior day’s black body.
  • The second candle is a green (bullish) candle with a small real body.

Additional Notes:

  • The pattern looks like a failed Piercing Pattern. To read more about that pattern, have a look at this article: Piercing Candle Pattern Explained.
  • When the price moves under the second candlestick low, that can be a signal of a continuation of the down-trend and a potential sell signal.
  • This pattern is almost exactly the same as the In Neck Candle Pattern with just a slight difference with the second candle’s movement into the first candle’s range. To see the difference read this article: In Neck Candle Pattern

Quick Reference Guide – Candlestick Basics. If you need a reminder of what candlesticks are have a look at our free PDF – Candlesticks Explained.

The criteria and examples above are just the technical definitions of this pattern. However patterns are only useful with context and with real chart examples.

No pattern will ever exactly match the criteria and in order to be a useful signal must occur in the correct place in a trend. Let’s start by looking at the the classification table for this pattern:

On Neck Candle Pattern Classification Table

Number of Candles In Pattern 2
Type: (Reversal/Continuation) Continuation
Bullish/Bearish/Indecision Bearish
Market Conditions: Range, Down-trend, Up-trend Down-trend, Ranging
Position: Top, Bottom, Range Range

What Price Action Does The On Neck Candle Pattern Represent?

All candlestick patterns are formed by price action. But the popular ones represent price action that may have significance in signalling the direction of the market.

The On Neck Candle Pattern consists of an initial large bearish candle that forms in a down-trend. However, strong candles in the direction of a prevailing trend can often be followed by exhaustion of the trend and a reversal (or a pause at least).

Before we can see the initial bearish candle as a continuation of the trend, we need some confirmation.

The second candle opens below the low of the first candle (gaps down). This starts off as a positive downward signal, but then starts to move up.

This could be the start of a reversal pattern but the move fails and the second candle’s real body fails to break into the first candle’s real body with only no intrusion into it.

This failure to reverse the bearish momentum is a potential signal that the bears are still dominant that a continuation of the trend down will occur. When the price moves below the low of the second candle then it could be a signal to sell.

On Neck Candle Pattern With Confirmation

In this US30 market example below we can see that the market was in a downtrend. The market moved towards round level resistance and formed an On Neck Candle Pattern.

You can see that the upper shadow of the second candle moved higher but the real body failed to intrude into the first at all which showed good bearish momentum.

The market then broke below the bottom of the On Neck Pattern and also broke the round level resistance. A short consolidation at the resistance didn’t last long before a continuation of the downtrend took the market lower.

On Neck Candle Pattern Example With Confirmation Example
On Neck Candle Pattern Example With Confirmation Example

Note: you can get a free round level indicator for MT4 from us here: Round Levels MT4 Indicator.

In What Market Conditions Does On Neck Candle Patterns Become A Signal?

To recap, the On Neck Candle Pattern is seen as a bearish continuation pattern when it forms in an existing down-trend and then the market moves below the second candle.

Note: With any candle pattern or signal, it is more significant when there is confirmation from another indicator or via forming at a key level. It is always good practice to look for confirmation for any signal that you are looking to trade.

On Neck Candle Pattern In A Down-Trending Market

A down-trending market is one where the price action generally moves down over time and is characterized by lower lows and lower highs.

Down-trending Market Example
Down-trending Market Example

This signal is most valid when seen in a down-trending market.

In this US30 market example below the market was in a downtrend. A strong red candle was followed by a failed reversal candle and formed the On Neck Candle Pattern

The market then continued its trend lower and price action moved down.

On Neck Candle Pattern In A Down-trending Market Example

On Neck Candle Pattern In A Ranging Market

A ranging market is one where the price action moves up and down between two sets of support and resistance. This is also known as a sideways, balancing or horizontal market. In essence the price action is struggling to break out of the range decisively either on the upside or downside.

Ranging Market Example
Ranging Market Example

Although not generally a strong signal in a ranging market, this pattern, when forming in the downward leg of a ranging market can be seen as a signal that the market will continue to the bottom of the prevailing range.

As you can see in this example of the US30 market the price action had formed a range of support and resistance. In one of the reversals from the resistance (down leg), an On Neck Candle Pattern formed which was a good indication of the continuation of the downward trend to the bottom of the range.

On Neck Candle Pattern In A Ranging Market Example
On Neck Candle Pattern In A Ranging Market Example

Candle Pattern MT4 Indicator Downloads

If you trade using MT4 then why not try out our free MT4 indicators? Most of our indicators, including the most common candle pattern indicators are Free and available for download here: MT4 Indicator Page.

Most of our candle indicators also have an alternate version which can show the signal in a separate indicator window of the chart if that is your preference.
For advanced users you can use our Pin Bar Pattern Manager (Paid) to specify your own parameters of candles you want to identify. You can find that here.

Important Information About Candlestick Patterns

Attribution:

All of the candlestick patterns that we explain on NothardTrading.com must be attributed to Steve Nison and his books on candle charting, the most famous of which was Japanese Candlestick Charting Techniques (Amazon). You can also find out more at his website here.

Interpretation Of Candle Patterns:

It is important to note that these patterns were originally identified on the daily timeframes of index charts, which is still where they are the most useful. However, this does not mean that they cannot be used for other markets or time frames.

No signal is perfect and should never be used as such. Any patterns that you identify only signals a potential move based on the fact that history repeats itself and forms regular patterns in similar situations.

But past performance is no guarantee of future results! So always treat these patterns with care and think of these guidelines when using them.

Best practice guide for trading of candle patterns:

  • No pattern is ever perfect. Be aware that patterns will form slightly differently each time and in different markets.
  • Use them as consistently as possible. Even though you will never find patterns exactly the same, you should always implement a consistent ruleset when identifying and using patterns.
  • It is never a guarantee, only an indication.
  • Make sure you are using it in the right context. For example if it is a continuation pattern then don’t use it to trade reversals!
  • Use multiple signals (confirmations) to have more confidence in your trading.

Related Candle Patterns

In Neck Candle Pattern

To learn more about In Neck Candle Pattern, see our article here: In Neck Candle Pattern Explained

Piercing Candle Pattern

To learn more about Piercing Candle Pattern, see our article here: Piercing Candle Pattern Explained.

Bearish Thrusting Pattern Candle Pattern

To learn more about Bearish Thrusting Candle Pattern, see our article here: Bearish Thrusting Candle Pattern Explained.

Bullish Counterattack Lines Candle Pattern

To learn more about Bullish Counterattack Lines Candle Pattern, see our article here: Bullish Counterattack Lines Candle Pattern Explained

Justina Nothard

Justina Nothard

Hi, I’m Justina Nothard, a retail investor trading Stock Index Futures.

I understand how hard it can be for the ordinary trader to learn the basics and find useful tools and practical information.

This is why I decided to create Nothard Trading to help you take control of your trading.

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