In Neck

The in neck candlestick pattern is a rare two-bar bearish continuation Japanese candlestick pattern that is best traded using a bullish mean reversion strategy in the stock market, according to to backtest data.

If you’re following traditional in neck candlestick strategies, you’re likely losing money or barely breaking even.

Keep reading if you want to learn how to trade the in neck like an ancient samurai warrior using the best in neck trading strategies, according to history.

What Is an In Neck Candlestick Pattern?

In Neck Candlestick Pattern Illustration © Analyzing Alpha
In Neck Candlestick Pattern Illustration

The in neck candlestick pattern is supposedly a two-bar bearish continuation pattern.

The in neck name comes from the previous candle appearing to be in the neck of another. 

The pattern is supposed to lead to bearish action, but the data tells us to go in the other direction. But before we learn the best in neck trading strategy, let’s learn how to identify this two-bar pattern.

How to Identify the In Neck Candlestick Pattern

In Neck Candlestick Pattern on the Akamai (AKAM) September 18th, 2018 daily chart
In Neck Candlestick Pattern on the Akamai (AKAM) September 18th, 2018 daily chart

The following are the requirements for a valid in neck candlestick pattern:

  • The first candle is long and bearish.
  • The second candle is bullish, opens below the previous candle’s low, and closes slightly into the previous day’s body.
  • The in neck must occur during a downtrend.

We see the in neck on the Akami (AKAM) September 18th, 2018, daily chart.

The price is under the fifty-day moving average at the time of the pattern’s close, giving us a bearish trend. We see a large red bearish candle followed by a green candle that opens below the prior day’s low and closes into the previous day’s body, fulfilling the in neck pattern requirements. 

Now that we know how to identify these two-bar patterns, how do we best trade this supposed bearish continuation?

How to Trade In Neck Candlestick Patterns

The in neck candlestick pattern should be traded using a bullish mean reversion strategy in the stock market, according to a 21-year backtest. 

Crypto and forex traders should avoid trading this pattern due to a lack of data and statistical significance when determining the best in neck trading strategies.

Let’s learn how traders typically choke their portfolios when trading this pattern, and then we’ll how data-driven, professional traders decapitate the competition.

In Neck Bearish Continuation Trade Setup

In Neck Bearish Continuation Trade Setup on the FedEx (FDX) May 19th, 2010 daily chart
In Neck Bearish Continuation Trade Setup on the FedEx (FDX) May 19th, 2010 daily chart

Let’s practice identifying the in neck pattern.

We see that that price is in a clear downtrend. There’s a sizeable bearish candle followed by a bullish candle that opens below the prior candle’s low and closes just above the previous candle’s close, giving us the distinct in neck pattern.

With the in neck identified, traditional traders go short at a break of the second candle’s low, setting a stop loss at or above the first candle’s high.

We see that a trader using traditional in neck trading techniques on the  FedEx (FDX) daily chart on May 19th, 2010 strangled some gains out of the market.

The problem is that this trader, while lucky this time, is on the wrong side of history

In Neck Bullish Mean Reversion Trade Setup

In Neck Bullish Mean Reversion Trade Setup on the ASML Holding (ASML) March 13th, 2008 daily chart
In Neck Bullish Mean Reversion Trade Setup on the ASML Holding (ASML) March 13th, 2008 daily chart

Data-driven traders wait for the price to go below the pattern low and then enter long when the price comes back above that low, setting a stop loss of one ATR.

Let’s use ASML Holding to shine a bright light on this strategy to embed this pattern into our minds.

The pattern low occurs on the second day at $29.81. The price crosses below this price the next day, alerting traders to be ready for a long entry. The price moves above the pattern low on the 18th, triggering an entry. This savvy stock trader likely exited on the 24th for a substantial gain.

Speaking of profits, what can history tell us about the best in neck trading strategy?

Does the In Neck Candlestick Pattern Work? (Backtest Results)

Using the following rules, I backtested the in neck candlestick pattern on the daily timeframe in the crypto, forex, and stock markets.

  • A close above the 50-day SMA constitutes an uptrend.
  • I tested risk-reward ranges from 1 to 5. 
  • The optimal risk-reward ratio is selected using profit per bar.
  • Entry and exits are discussed in the how-to trade section above.
  • Confirmation must occur within three days of the pattern signal.

Similar Candlestick Patterns

Multiple candlestick patterns are often confused with the in neck pattern. It’s essential to identify these patterns correctly when practicing technical analysis.

On Neck vs. In Neck

On Neck Candlestick Pattern Illustration © Analyzing Alpha
On Neck Candlestick Pattern Illustration

The on neck candlestick pattern is a two-bar bearish continuation pattern similarly named to the in neck pattern. The only difference between the on neck pattern and then in neck pattern is that the on neck’s second candle closes at the low, whereas the in neck candlestick pattern closes slightly into the prior candle’s real body.

Bullish Counterattack vs. In Neck

Bullish Counterattack Candlestick Pattern Illustration © Analyzing Alpha
Bullish Counterattack Candlestick Pattern Illustration

The bullish counterattack, also known as the bullish counterattack line, is a two-bar bullish reversal pattern. The bullish counterattack and the in neck candlestick patterns are often confused because their defining characteristic is where the second candle closes relative to the first. 

The bullish counterattack’s second candle closes equal to the previous candle, forming a horizontal line. The in neck second candle moves slightly above the prior close, giving it the in neck appearance.

The Bottom Line

The in neck is a two-bar bearish continuation pattern that’s best traded using bullish mean reversion trading strategies in the stock markets, according to a 21-year backtest. The pattern is supposed to mean bearish action ahead, but the data shows that it portends near-term volatility into a potential trend change.

Crypto and forex traders should avoid trading this pattern due to a lack of data to form any statistically significant conclusions. These traders should look at the most common Japanese candlestick patterns.

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