Dragon" pattern - an exotic variety of trend reversal patterns
The pattern "Dragon" - one of the "exotic" varieties of reversal figures in the market and, to be more precise, is a more modified version of "Double Bottom" pattern, which signals the change from a bear market to a bull market. Correspondingly, the "Inverse Dragon" pattern is formed when the growing trend is over and the market starts its decline. Signals of the inverse pattern are similar to those of the "Double Top" pattern.
How does the formation of the pattern "Dragon" on the price chart?
The pattern "Dragon" is formed in a falling market. Its formation begins with the Head (1). It represents the local maximum from the ascending corrections in a falling market. After the formation of the Dragon Head pattern, the market continues to decline, as a result of which two lows (approximately at the same level) sequentially appear on the price chart. These are the Dragon Feet.
The local minimum from the first test of the support line on the lower boundary of the pattern forms the "First Leg of the Dragon" (2). The Second Leg is formed after retesting the same support level (4). The difference between the lows of the First Leg and the Second Leg can be from 5 to 10 percent.
Between the Legs of the Dragon or before the 2nd minimum a top should be formed (local maximum - correction from the downtrend), which is called the "Hump of the Dragon". In its essence, the "Leg - Hump - Leg" formation is a "Double Bottom" reversal pattern. The height of the Hump is located at the level of 38-50% from the height of the Head.
The end of the formation of the pattern "Dragon" is indicated by the closing of the price above the Dragon Ridge - the trend line (or resistance) drawn on the points of his Head and Hump.
The formation of the inverse pattern "Dragon" occurs by the same rules, but in a rising market. Head and Hump represent local minimums, and Legs represent maximums as a result of testing the upper boundary of the pattern. The formation of the pattern is completed after the price has passed the support line, which, as well as for the straight Dragon, is drawn from its Head and to the Ridge.
How to trade using the pattern Dragon?
When using the pattern "Dragon" to trade in the market, a position is opened after the end of its formation, that is, after the price breaks the trend line or Ridge pattern. In order to avoid entering the market on a false breakout, it is better to wait for the moment when the closing price of the next candle or bar will be above this line.
For the pattern Dragon in a downtrend, the price break of the trend line and the closing of the Japanese candle above the line, signals the trader to open a Buy position.
After that, the warrant stop loss is placed a few points (10-20) below the lower boundary of the pattern "Dragon", i.e. below its Legs. Potential profit in pips corresponds to the length of the Tail of the Dragon, which is usually equal to the height from the point of the trend line penetration to the point of maximum of its Head. Simply put, the distance of the Tail is our future profit from realization of a trade.
When trading on the pattern "Dragon", it is advisable to enter the market with several positions simultaneously. At the beginning, for the first transaction, the trader can determine a more modest profit target, for example, at the level of the Dragon's Feet.
Take Profit for the second position (2nd target) can be set at the level of the Head. In case the first target is reached, it is advisable to move the stop loss to breakeven level. Further, when the price reached the middle of the Ridge pattern "Dragon", protective stop move to the level of the height of the Legs. This will allow the trader to minimize his risks and get the maximum possible profit from entering the position, even if the second goal is not achieved.
As an option, to set the necessary levels of profit taking, the trader can use Fibonacci levels. To do this, we draw a Fibo grid on the pattern "Dragon", starting from the point of Feet to the Head.
At the same time, take profits for transactions can be evenly set at important Fibonacci levels. For example, as shown in the figure, for 3 transactions, these levels are 38.2%, 50% and 100%, respectively.
For the reverse pattern "Dragon" in an uptrend, the same rules for opening and maintaining positions apply, only here it is a Sell. An example of this situation can be clearly seen in the figure below.
In addition to the above, there are additional signals indicating the veracity of the trading signal pattern Dragon, they can be:
- formation of a reversal candle or bar;
- The signals from the oscillators (macd, rsi, stochastic and others). also do not forget about the possibility of divergence on the readings of these oscillators;
- increase in the volume of trade on .
A one-step change in the main direction of market movement occurs very rarely. As a rule, a trend reversal is accompanied by the formation of several minimums or maximums in the same price range. The "Dragon" pattern is based on the rules for determining these reversal points, which allows you to open a position at the very beginning of a new price trend.
This, in turn, allows the trader to make trades with an optimal risk-return ratio. Besides, the pattern "Dragon" is formed more often than similar patterns "Double Bottom" and "Double Top". Moreover, it is formed practically at all timeframes. Correspondingly, it may be used both in long-term and short-term trading.
In conclusion, I would like to add that The negative point in trading on the basis of the pattern "Dragon" is the fact that such figures on the price charts are formed quite rarely. Therefore, effective trading with it alone will be almost impossible.
But this does not mean that this pattern should be ignored in trading. On the contrary, you should definitely use it, because even though such signals are rare, they work out very effectively.
That's a rare pattern.