How do you identify an On Neck candlestick pattern? Imagine you’re playing a game where you’re trying to figure out if something will keep going in the same direction or if it will change. In trading, there’s something called the “On Neck” pattern that helps traders guess whether the price of something will keep going down. It’s called a “continuation pattern” because it suggests that a downward trend might continue.

The On Neck pattern happens in two parts:

1. The Big Down Candlestick: First, you see a large red candlestick. This is like a big, angry signal showing that lots of people are selling. The red candlestick is longer, meaning the price dropped a lot.
2. The Little Up or Down Candlestick: Next, a smaller candlestick appears. This one might be red or green (bullish or bearish), but it doesn’t go up much higher than the bottom of the first big candlestick. It’s like a small pause before the price might keep going down.

How Does It Form?

The On Neck pattern forms over two trading sessions (days or other periods depending on the chart):

1. First Candlestick: This is a big red candlestick. It shows that there was strong selling, and the price went down a lot.
2. Second Candlestick: This one is smaller and opens below where the first one ended. It closes close to or slightly above the bottom of the first candlestick. This little candlestick shows that buyers tried to push the price up, but didn’t manage to change the trend.

What Does It Mean?

When you see an On Neck pattern, it’s a hint that the price might keep going down. The small candlestick shows that buyers couldn’t make the price go up very much, and sellers are still in control. It’s like the price is taking a short break before continuing its downward path.

Real-Life Example On On Neck Pattern

Let’s say you’re looking at a chart for a currency pair, like GBP/USD, during a time when the price has been dropping. If you spot the On Neck pattern, where a big red candlestick is followed by a smaller one that closes near the bottom of the first candlestick, it means the downward trend might continue. Traders use this pattern to help make decisions on what might happen next.

Trading Strategy with the On Neck Pattern

If you want to use the On Neck pattern in your trading, here are some tips:

1. Check the Downtrend: Make sure the On Neck pattern is happening in a strong downward trend. It’s more useful when it follows a clear drop in prices.
2. Look for Confirmation: After spotting the pattern, wait for the next candlestick to confirm that the price will keep going down. This extra step helps make sure the pattern is working as expected.
3. Use Stop-Loss Orders: To protect yourself from unexpected price changes, place a stop-loss order above the highest point of the small candlestick. This way, if the price does go up instead of down, you won’t lose too much.
4. Combine with Other Tools: Use the On Neck pattern alongside other tools like moving averages or the Relative Strength Index (RSI) to get a clearer picture of what might happen.