Dragon Pattern

Dragon Pattern

Dragon Pattern

Perhaps one of the strongest reversal patterns on a downtrend can be considered the “Dragon " pattern. In a bullish trend, the reversal signal will be considered the formation of A reverse “Dragon".

If we look at this Price Action pattern more closely, this formation is very similar in structure to a Double top and Double bottom. However, it has some significant differences. We'll talk about them below.

Important: the technical analysis figure trades equally well not only on long-term timeframes, but also on short-term ones. The considered currency assets are absolutely any.

The application of this pattern can be characterized by high profitability and low risks.
How is the "Dragon" pattern formed?

This pattern is formed from the head. It represents the price maximum in a bear market from an upward correction. When this maximum is formed, the price falls down, forming a wave-like movement. This is how the first paw, hump, and second paw of the pattern are formed.

The local price minimum from the first testing of the "head-hump" level represents the first paw. The second paw is formed from the 2nd test of the same level. Often, the difference between the first and second legs can be a little – 5-10%.

When a divergence is formed on the second leg of the dragon, this only confirms the appearance of the Forex “Dragon " pattern. Divergence is well shown by the RSI, Stochastic and MACD indicators.
This vertex is a local maximum when the downward trend line is moving correctly. If you visually connect three points together (the first paw, hump, and second leg), we get A double bottom reversal formation.

The local maximum of the pattern can be determined by stretching the Fibonacci grid. The hump will be located between the values of 38% and 50%. It stretches from the head to the lowest paw. You can draw a trend line from the maximum of the head, as well as the hump, which will give us an indication of entering the market. After all, a break of this line will signal a trend reversal.
Pattern The “Inverse Dragon”

The formation of this pattern can be observed not only on a bearish trend, but also on a bullish one. That is, the “Dragon” pattern on Forex is considered in this case, as in the case of a downward trend, only in a mirror image.
Now the head and hump are local lows, and the paws are price highs formed as a result of testing resistance levels.

If there is a breakdown of the trend line that connects the local lows (head and hump), we can talk about a reversal formation “Dragon".
How to trade using the “Dragon " pattern?

Enter the market within this reversal pattern only when it is fully formed. This happens only after breaking the trend line that connects the highs of the hump and head in a bear market and the lows (head and hump) in a bull market.

But what about false breakouts? After all, they can occur at any time, which will lead to an incorrect entry into the market, if the trend line is broken. You need to wait on the selected timeframe until the signal Japanese candle that broke through this very trend line closes beyond its borders.
Where can I set Stop loss And Take Profit?

If You entered using the "Dragon" pattern, you should definitely set a Stop-Loss. It is set 2-3 points lower than at least one of its paws.

As for the Take Profit stop order, it must be placed at the maximum level of the head. The distance that the price passes from the moment of breaking the trend line to the head is called the “tail” of the dragon.

However, most professional Forex market participants advise entering the market with two orders within the pattern. Alternatively, you can partially fix the profit. This will be the first goal (it can be located at the maximum or minimum of the dragon's hump). Don't forget to move the trade to breakeven when the first Take Profit goal is reached. When the price reaches the middle of the ridge of the “Dragon " pattern” The stop loss for the second trade can be dragged after The price by setting it at the height of the hump.

Also, be sure to follow the rules of the safe. This login method is considered more secure than traditional ones. This will reduce possible risks, as well as increase the maximum profit from the moment of opening the transaction. This is despite the fact that the price may not reach the second goal.

You can also consider taking profit on the “Dragon” pattern at the following Fibo levels: 38.2%, 50%, and 100%. Clearly, they will see a pullback in price movements.

As we mentioned above, the Fibonacci lines correctly stretch from the maximum of the head to the minimum of the 2nd leg (this is for a bearish market movement).

Keep in mind that in addition to divergence, a reversal candle may form on the market, signaling a reversal pattern “Dragon". Also, pay attention to large volumes.

Keep in mind that if you have a well-formed figure, it can be destroyed in the blink of an eye after the release of certain important economic news. Therefore, do not forget to monitor the economic calendar and news with “three heads " in it. It is better to refrain from making deals when important news is released, at least for a while, until the situation becomes clearer.
Conclusion

Above, we studied the “Dragon” reversal pattern not only in bear markets, but also in bull markets. We learned how to trade this pattern, in particular, we identified a signal candle.

If you learn how to correctly identify this reversal formation, you can close deals mainly in the plus, since we enter the market at the very moment of the birth of a new trend.

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