“On Neck Line” or “Atekubi”

“On Neck Line” or “Atekubi”

The “On Neck Line” or “Atekubi” is a Japanese candlestick pattern that appears in a downtrend and is considered a bearish continuation pattern. It is characterized by a long black candle followed by a smaller white candle that gaps down but closes near the prior candle’s close, forming a horizontal neckline where the closing prices are the same or almost the same.

Key Characteristics:

  1. First Candle: A long black candle in a downtrend.
  2. Second Candle: A smaller white candle that gaps down on the open but closes near the prior candle’s close.
  3. Neckline: The closing prices of the two candles are the same or almost the same, forming a horizontal neckline.

Forecast and Interpretation:

  1. Forecast: The pattern is theoretically considered a continuation pattern, indicating that the price will continue lower following the pattern. However, in reality, it acts as both a continuation pattern and a reversal pattern with nearly the same frequency[2].
  2. Confirmation: The pattern should be confirmed on the following candles by a candle closing below the opening price of the second line[1].

Statistics:

  1. Frequency: The pattern appears relatively infrequently, with only 64 occurrences in the S&P500 daily stocks from July 1, 1995, to June 30, 2015, and 4 occurrences from July 1, 2010, to June 30, 2015[1].
  2. Efficiency: The pattern has an average frequency of 34,944.1 and 153,508.5 for the respective date ranges[1].

Trading Implications:

  1. Trading: Trading on the pattern could result in any number of variations, including short-term reversals higher[2].
  2. Confirmation: Confirmation of the pattern by a candle closing below the opening price of the second line is crucial for trading decisions[1].

Conclusion:

The “On Neck Line” or “Atekubi” is a bearish continuation pattern that appears in a downtrend and is characterized by a long black candle followed by a smaller white candle that forms a horizontal neckline. While it is theoretically a continuation pattern, it often acts as a reversal pattern in reality, making it important to confirm the pattern before trading.

what are the common mistakes when trading the On Neck pattern

When trading the On Neck pattern, several common mistakes can lead to losses or false signals. Here are some key pitfalls to avoid:

  1. Not Waiting for Confirmation:
  • The pattern is not complete until the price breaks through the neckline. Failing to wait for this confirmation can result in false signals and losses[1][2][4].
  1. Not Identifying the Neckline:
  • The neckline should be a horizontal line formed by the closing prices of the two candles. If the neckline is not properly identified, the pattern may not be valid[1][4].
  1. Not Considering Other Factors:
  • The pattern should be observed in the context of overall market conditions and current trends. Additionally, traders should consider paying attention to volume and other indicators that can provide additional confirmation[1].
  1. Not Determining the Target Price:
  • The target price is usually determined by measuring the distance between the neckline and the highest peak of the head and subtracting this amount from the breakout point. Knowing the target price can help traders manage their risk and plan their trades accordingly[1].
  1. Not Implementing Risk Management:
  • Traders should always employ risk management when trading the On Neck pattern. This includes setting stop-loss orders and limiting potential losses[1].
  1. Not Monitoring Volume:
  • Volume is an important factor to consider when trading the On Neck pattern. Typically, the volume should decrease as the pattern forms and increase when the price breaks below the neckline. Ignoring volume can lead to missed opportunities or entering trades with weak confirmation[2].
  1. Placing Stops Too Close:
  • Stop-loss orders should be placed at a reasonable distance from the entry point to avoid premature stop-outs. The head and shoulders pattern can be prone to pullbacks before the downtrend resumes[2].
  1. Neglecting Risk Management:
  • Risk management is crucial when trading any pattern, including the On Neck pattern. Traders should determine their risk tolerance and adjust their position sizing accordingly[2].
  1. Overtrading the Pattern:
  • Traders should be selective and only trade patterns that have strong confirmation and meet their criteria. Overtrading can lead to losses[2].
  1. Failing to Adapt to Market Conditions:
    • Market conditions can change, and the On Neck pattern may not always be effective. Traders should be aware of the overall market trend and consider other factors such as support and resistance levels, fundamental analysis, and market sentiment[2].

By avoiding these common mistakes, traders can increase their chances of success when trading the On Neck pattern.

how can I ensure I’m waiting for confirmation before entering a trade

Here are some key steps to ensure you wait for proper confirmation before entering a trade:

  1. Identify a catalyst for the potential trade. Ask yourself why you expect the price to move in a certain direction. Having a clear reason or catalyst is crucial before entering any trade[1].
  2. Determine if the market is in a trading range or trending. Align your trading strategy accordingly – range traders look for upper/lower boundaries, while trend traders leverage trend lines and moving averages[3].
  3. Identify nearby support and resistance levels. These act as psychological barriers and can influence the trade’s outcome. Use this information to set strategic entry and exit points[3].
  4. Confirm the price action with multiple indicators from different categories (trend, momentum, volatility, volume). For example, a golden cross (50-day MA crossing above 200-day MA) needs confirmation from volume or OBV[5].
  5. Assess the risk-to-reward ratio and ensure your potential risk is within your capital risk tolerance. Proper risk management is key to sustaining profitability[3].
  6. Wait for the trade to be confirmed by a candle closing below the opening price of the second line in the On Neck pattern. Entering too early can lead to false signals and losses[1][2][4].
  7. Ensure the trade aligns with your trading plan. Adhere to your plan to maintain discipline and avoid impulsive decisions that can erode your capital[3].
  8. Review the trade confirmation sent by your broker to verify the details match your executed trade. Discrepancies can lead to disputes down the line[4].

By following these steps and waiting for multiple confirmations, you can increase the probability of entering trades with a higher likelihood of success. Avoid rushing into trades without proper validation.

what indicators should I use to confirm the neckline break in the On Neck pattern

To confirm the neckline break in the On Neck pattern, you should use the following indicators:

  1. Moving Averages:
  • Look for the price to break below key moving averages like the 50-day or 200-day MA. If the price is below these moving averages and breaks the neckline, it signals a bearish continuation[5].
  1. Volume:
  • An increase in volume during the neckline break confirms that the selling pressure is being supported by strong volume. Higher volume during the breakdown indicates that many traders are selling, which could lead to further downward momentum[2].
  1. Momentum Indicators:
  • Momentum indicators like the Relative Strength Index (RSI) and Stochastic Oscillator can help confirm the bearish trend. For example, if the RSI is in overbought territory above 70 and then falls below 30 on the neckline break, it indicates a bearish signal[2][5].
  1. Trend Lines:
  • Draw a trend line connecting the reaction lows of the pattern. If the price breaks below this trend line in conjunction with the neckline break, it provides additional confirmation of the bearish continuation[3].
  1. Candlestick Confirmation:
  • Wait for at least one bearish candle to close below the neckline for confirmation. This candle should have a lower low than the neckline to validate the breakdown[1][4][5].

By using a combination of these indicators, you can increase the probability of a successful trade when the On Neck pattern breaks its neckline. Remember to always use stop-loss orders and manage your risk appropriately.


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