The “Dragon” pattern is a simple pattern of technical analysis that refers to reversal price models and its occurrence predicts the future change in the market tendency (trend).
It is visually similar to the Chinese dragon.
The “Dragon” pattern consists of five elements, namely: a head, two feet, a hump between the feet and a tail. At that, one should be able to draw a trend line from the pattern’s head to the highest point of its hump. Here is an example.
The “Dragon” can be both bullish and bearish, and the rules of trading with them are mirror of each other. Therefore, we’re going to give a description of the strategy only for the bullish pattern not to duplicate it.
According to the classical strategy, a trend line should be drawn from the pattern‘s head to its hump. You may enter the market at the point where the price crosses this line. See the example on the picture below:
- Enter the market at the point where the price crosses the trend line.
- Take Profit 1 is our first target. Place a Take Profit order at the hump’s highest point level.
- Take Profit 2 is our second target which is at the level of the pattern’s head.
- Stop Loss is set beyond the level of a larger foot of the “Dragon”.
When you trade with this strategy, you might have questions, so we’re going to try to answer some of them.
Nuances of Trading With the “Forex Dragon” Pattern
- The “Dragon” feet length. Different sources state that the first foot must be necessarily longer than the second one, but we believe the opposite is true: while the pattern is forming, and the second foot is longer, the market movement has a higher potential;
- Trend line (from the head to the hump of the pattern) should be clearly visible, or otherwise it makes no sense to continue the pattern analysis.
- The “Dragon” has two conflicting patterns. This is clearly shown in the pictures:
As we have already written in the article on patterns, you shouldn’t use them as a signal to enter the market.
The pattern should be used as a good entry point if there is a basic signal, so the conflict of patterns is not a problem.
Alternative Strategies for Trading With the “Dragon” Pattern
There are also alternative strategies in addition to the classical one, and it’s up to you whether to use them in practice or not, but knowing about them won’t hurt you.
If you take a close look, you’ll see that the “Dragon” price model consists of two other ones: “Double top/bottom” and a usual trend line. We need to make it clear that the strategy of trading with a trend line is used as a classical one (which is described above). The entry/exit points are also borrowed from these patterns.
Now let’s consider an alternative “Double top/bottom” strategy. See the following picture for more details:
- We enter the market when the price breaks the support line – see the point (1).
- Take Profit (TP) is set at the level of the initial point of the pattern’s first impulse.
- Stop Loss (SL) is set a few points below the top of the pattern.
“Dragon” pattern is a bullish pattern which signals buying. “Inverted Dragon” is a bearish pattern which signals possible sales.
The above described strategy of trading with the “Dragon” pattern can be used for the “Inverted Dragon” pattern, but only in a mirror-like manner.
Examples of Trading With the “Dragon” Pattern in Forex
For better clarity, let’s consider a few more examples of “Dragon” patterns where we use some of our best practices, for example, a Stop Loss different from the classical one. Read more about this technique in this article.