On Neck Candlestick Pattern

Podcast Duration: 06:36

Hello Friends, welcome to today's podcast by Angel One.

Today we are learning from the story of Ayush, a seasoned investor.

It is time for Aisha and her older brother Ayush to sit down for their quarantine learning sessions. Aisha has recently started trading on the exchanges while learning the how-tos from her brother Ayush, usually with snacks and hot coffee.

Ayush began with a ready reckoner about Candlestick patterns and how they play a key role in technical analysis.

He picked up his hot coffee and started by saying that candlesticks are tools that show price movement of a specific security during a given time period, usually a day. It is depicted as a candle's body and the wicks that extend from the top and bottom of it. It includes elements such as the opening and closing price, the highest and lowest price trading for the particular timeframe.

He stopped for a sip and continued by saying that there are many candlestick patterns. Candlestick patterns can depict reversal and continuation of price trends. In a continuation pattern, the market direction is confirmed while a reversal shows that there is a change in the direction. Candles that confirm or continue a specific trend in the market are called trending ones. The opposite ones are called non-trending.

Ayush wanted to discuss a continuation pattern known as On-neck Candlestick pattern which he spotted the night before while looking for potential trades. It is also a bearish pattern.

At this point Aisha was curious to know how he did that. Let's find out.

Ayush spotted the classic giveaways of an On-neck pattern.

Day before yesterday, the price of one of his low performing assets had dropped very low, all in a single day's time. And yesterday the price action started at a price lower than the previous day's last closing price. The candle representing the previous day's price action was bearish. This was the first candle. Yesterday's candle was bullish. This was the second candle. The first candle's body was long while the second one was shorter. Ayush's asset's price yesterday closed a little below the price it closed at the day before. So the second candle closed near the first one. Almost there.

The pattern gets its name because the point at which the closing prices of the two are nearly the same or same, it forms a horizontal line which looks like a neck or a neckline.

Ayush then observed that a downward trend was in progress. And decided to place a sell his stock before it dropped lower.

For confirmation, he decided to watch out for the third day's candle. And today, the third candle happened to be bearish and continued the downward trend.

Aisha was impressed and they were done with their snacks now. After quickly cleaning up the table, they continued their conversation on the comfortable couches.

Ayush thought it would be appropriate to mention another continuation known as the In-neck pattern. It is also a two-line continuation candlestick pattern. Like the On-neck pattern, it also occurs when the first candle shows a dip in price, during a downtrend. This pattern shows that the price will continue to go lower and a downtrend is on. But it is not as strong or severe as the On-neck pattern.

Ayush cautioned Aisha that it is easy to get the two patterns mixed up which is why she should examine the patterns closely before identifying which one is forming. The similarity is that there are two candles involved, where the first one is tall and bearish and the second candle is short and bullish.

Like the in-neck pattern is similar to the on-neck pattern, thrusting pattern is similar to both. The difference between the thrusting pattern and in and on-neck patterns lies in the closing point. In the thrusting pattern, the second day's price closes above the first price's closing but near or at the midpoint of the first candle's body.

If Ayush had sold off his assets following this pattern, he could have been in serious trouble as a thrusting pattern does not produce a clear result. It sometimes shows reversal and at other times the downtrend simply continues.

Aisha noted to be careful with this pattern as it is not a strong pattern that confirms the trend. It is ideal to club this with signals that are indicative of a downtrend before trading.

Traders should look carefully and take their time to identify an on-neck pattern because of the close similarities with the other two candlestick patterns.

As a revision test, Aisha had to summarize what she learned today. After an energizing deep breath, she went on something like this.

An on-neck candlestick pattern suggests that a downtrend will continue. It is shown by two candles. The first day, the closing price is below the opening price and there is a big difference between the two. But the second day, the closing price is just below or as much as the first day's price.

She should remember to watch the third candlestick to confirm the bearish trend.

An on-neck pattern is similar to the in-neck and the thrusting candlestick patterns. Even though the in-neck pattern is also an indication of a downtrend, it is not as strong as the on-neck. It is the same with the thrusting pattern which often gives mixed signs.

The bottom line is that the on-neck candlestick is the best confirmation that a downward trend will continue and prices might gradually fall lower.

She waited for Ayush to confirm if she got it right. Ayush nodded but reminded her again to use the pattern in association with other technical analysis tools for maximum reliability because--

She rolled her eyes and repeated with him in a chorus "-- no single tool can give you a complete picture of the market." And just like that, they were done with today's session.

Hope you learnt something as well! For more podcasts like this, visit www.angelone.in.

And as always, Happy Investing!