The chart patterns we have already looked at focused on one or two candlesticks at a time. In addition to these candlestick patterns there are also a number of different larger chart patterns which are formed by many candlesticks. Just like the candlestick patterns they are used to gauge the mood and psychology of the market.
Head and shoulders pattern
One of the most commonly used chart patterns is the Head and shoulders pattern. It indicates that the buying pressure (in the case of an uptrend) is being exhausted. This is a reversal pattern which comprises of 3 peaks and 2 lows with the central peak being higher than the other two. The level joining the two lows are referred to as the neckline. Once the pattern is complete and the price breaks through the neckline it is expected to continue downwards.
The pattern can also appear at the end of a downtrend as an upside down mirrored version of the one drawn above with the head being lower than the two shoulders
It should be noted that the Head and shoulders pattern is often not perfectly shaped with the neckline often ascending or descending or one shoulders being higher/lower than the other. In order to qualify a pattern as a head and shoulders when this happens, the lowest point of one shoulder should be lower than the peak of the other. Often even once the price breaks the neckline there may be a temporary pullback to the neckline (to test the resistance level created by the broken support level) before the price resumes its course downwards.
