On Neck

The on 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 the mutliple-market backtest data.

If you use Japanese candlestick charting techniques, you might be surprised to learn the data shows traditional on neck strategies will strangle your profits.

Keep reading if you want to learn history’s best on neck trading strategies.

What Is an On Neck Candlestick Pattern?

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

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

The on neck name comes from the prior candle appearing on the next candle’s neck. 

The data tells us the pattern leads to bullish action even though it’s considered by most to be bearish. But before we learn the best on neck trading strategy, let’s learn how to identify this two-bar pattern.

How to Identify the On Neck Candlestick Pattern

On Neck Candlestick Pattern on the Amazon (AMZN) December 12th, 2014 daily chart
On Neck Candlestick Pattern on the Amazon (AMZN) December 12th, 2014 daily chart

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

  • The first candle is long and bearish.
  • The second candle is bullish and opens below the previous candle’s low with a close equal to the prior low.
  • The on neck must occur during a downtrend.

We see the on neck on the Amazon (AMZN) December 14th, 2021, daily chart.

The price is hovering around the fifty-day simple moving average. The on neck’s last candle closes under the SMA, 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 at yesterday’s low, fulfilling the on neck pattern requirements. 

Now that we know how to identify this two-bar pattern, what’s the best on neck trading strategy?

How to Trade On Neck Candlestick Patterns

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

Forex and crypto traders should avoid trading this pattern due to a lack of statistical significance when determining the best on neck trading strategies.

Let’s learn how traders typically ruin their portfolios when trading this pattern, and then we’ll get a chokehold on how data-driven, professional traders take advantage of the bear’s naivety.

On Neck Bearish Continuation Trade Setup

On Neck Bearish Continuation Trade Setup on the Netflix (NFLX) August 2nd, 2019 daily chart
On Neck Bearish Continuation Trade Setup on the Netflix (NFLX) August 2nd, 2019 daily chart

Let’s practice identifying the on neck pattern.

We see a considerable bearish sentiment as the price is extended from the fifty-day simple moving average. There’s a sizeable bearish candle followed by a bullish candle that opens below the prior day’s low and closes equal to the low of yesterday, giving us the on neck pattern.

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

The challenge is that this trader is on the wrong side of history.

On Neck Bullish Mean Reversion Trade Setup

On Neck Bullish Mean Reversion Trade Setup on the Meta Platforms (META) February 22nd, 2021 daily chart
On Neck Bullish Mean Reversion Trade Setup on the Meta Platforms (META) February 22nd, 2021 daily chart

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

Let’s use Meta Platforms (META) to make this real.

The pattern low occurs on the second day at $257.33. The price crosses below and back above this low the next day, trigging an entry. This data-driven stock trader exited the next day with significant profits with nice risk-reward dynamics.

Speaking of great gains, what can history tell us about the best on neck trading strategy?

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

Using the following rules, I backtested the on 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 on neck pattern. It’s essential to not choke your profits and identify these technical analysis patterns properly.

In Neck vs. On Neck

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

The in neck candlestick pattern shares a similar name to the on neck pattern. The only difference between the in neck and the on neck pattern is the second candle in the in neck closes just within the prior real body, and the on neck closes equal to the low.

Bullish Counterattack vs. On Neck

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

The bullish counterattack line, also known as the bullish counterattack, doesn’t share a name like the in neck and is a bullish reversal. 

So why do these patterns get confused?

The bullish counterattack and the on neck candlestick patterns defining trait is where the second candle closes relative to the previous. The bullish counterattack forms a horizontal line as both candle closes are equal, whereas the on neck’s second candle closes equal to the prior low.

The Bottom Line

The on neck is a two-bar bearish continuation pattern that’s best traded using a bullish mean reversion strategy in the stock market, according to a 21-year backtest. The pattern supposedly portends future bearish action, but the data shows that near-term bullish volatility is more likely.  

Forex and crypto traders should avoid trading this pattern due to a lack of data eliminating statistically significant conclusions. With a little more data, however, this pattern could be one of the best forex candlestick patterns.

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