Reversal Patterns. The Dragon Pattern
The Dragon pattern is a straightforward yet fascinating technical chart pattern employed in Forex trading, named after the mythical Chinese dragon due to its visual representation. It can appear in a bullish or bearish trend (an inverted Dragon) and acts as a signal of impending reversal.
The pattern comprises five main components:
- Head: The pinnacle of the pattern, marking the highest price point.
- Two feet: These correspond to the lowest points of the pattern, symbolizing the Dragon’s legs.
- Hump: The crest between the feet, representing the Dragon’s back.
- Tail: The extension from the hump towards the right, depicting the Dragon’s tail.
How to trade the Dragon pattern
To identify and execute the bullish variant of the Dragon pattern in trading, use the following strategy:
Construct the trend line
Construct a trend line from the pattern’s head to the peak of the hump. This trend line acts as a guide for determining entry points.
Select an entry point
Trade when the price intersects the trend line. This intersection signals a potential bullish reversal.
Set Take-Profit levels
Position a Take-Profit order #1 at the peak of the hump. Then place a Take-Profit at the height of the pattern’s head.
Place a Stop-Loss
Establish the Stop Loss beyond the foot of the Dragon pattern that is furthest from the head.
The Dragon pattern: important considerations
- Foot length: While some analysts recommend the first foot to be longer, others argue that a longer second foot enhances the pattern’s potential.
- Visibility of the trend line: Ensure the trend line from the head to the hump is clearly defined for accurate interpretation.
- Conflicting patterns: The Dragon pattern may appear alongside other patterns, such as the flag or three-drive. Utilize it as an entry point in conjunction with a primary signal.
Keep in mind that the Dragon pattern is indicative of potential reversals, but it should be used in conjunction with other technical analysis techniques for a thorough trading strategy.
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