Pattern "Dragon". Description and trading strategy

quite common in the forex market and other financial markets and allows traders who are familiar with to successfully receive, thanks to the knowledge of all the intricacies of building and further developing a graphical model, the desired profit.

In forex technical analysis, pattern recognition is defined as the process by which traders "recognize current events while identifying certain predictable price patterns."

Although forex patterns very rarely repeat at the same trading levels or in the same time intervals, but all the same, there are patterns that repeat in certain forms and certain sequences.

The ability to recognize these kinds of patterns and trade according to certain rules on these chart patterns will help you become a successful forex trader. At the same time, successful recognition of the graphical model and trading on it should consist of a starting point and basic rules on the trading methodology. In this forex strategy, we will consider one of the patterns, which is called "Dragon", as well as justify the basic rules of trading on this forex pattern.

The Forex market very rarely goes from bearish to bullish and vice versa (the exception is V-bottoms and V-tops), without a series of certain kinds of price trends, in which formed support and resistance levels are tested. The “dragon” pattern is also based on such pivot points. and give us a good method to deal with them.

Pattern "Dragon" can be found on all time intervals and on all currency pairs.

Description of the Dragon Graphic Model:

The "Dragon" pattern is very similar to the W pattern or the " " pattern, but it has there are several distinctive rules and targets. Accordingly, inverted dragon patterns are similar to the M pattern, or Double Top.

"Dragons" very often appear on the market near market bottoms. Like double bottoms, dragon patterns are excellent opportunities to enter a trade with a low level of risk in relation to the potential reward.

The “Dragon” pattern begins its formation from the “head”, after which the price on the chart decreases and thus forms a 2nd “dragon paw”. Very often the difference between these 2 paws is 5 -10%. On the 2nd formed paw, a signal for a market reversal appears - a reversal bar or a divergence with oscillators (for example, MACD, RSI, Stochastic, etc.)

An increase in the volume of trades that follows a price reversal in the market is also a good sign of a reversal. When forming a pattern, we can draw a trend line from the "dragon's head" to its "hump".

As soon as the price closes above the trend line, and thus we receive a graphical confirmation (or we receive confirmation on the oscillators described above), then this is therefore a trend reversal signal. The 2nd confirmation of this forex pattern is the closing of the price above the level of the formed “hump”, which is an oscillatory maximum between the two resulting “legs of the dragon”.

Picture 1

Structure of the Dragon pattern:

A - "Dragon's Head"
B - "The first leg of the dragon"
C - " Dragon's hump" (should be within 0.38 - 0.5 from AB)
D - "The second leg of the dragon" (tends to be 0.618 or 1.27 from AB)
E - Breakdown of the formed trend line (signal to open a trading position to buy)
F - First profit target - 1.27 CD
G - Second profit target - 0.886 - 1.0 BC
H - Third profit target - 1.38 AB
I - A safety stop loss should be placed a few ticks below the lowest low of the two legs of the dragon.

Figure 2

In figure 3 you see Dragon pattern on the 30-minute price chart(M30) Dow E-mini futures. On January 3, 2007, the market price formed a “Dragon's head”. After that, the price fell until January 8, until the moment when the first leg of the Dragon was formed. On January 8, an attempt was made to recover to the price level of 12520. After that, we can draw a trend line, while connecting the top of the Dragon's head and the top of the Dragon's first leg. And on January 10, the second leg of the Dragon was formed, the price on the chart rolled back from the top of the Dragon hump to the level of 12420. The final confirmation of the formation of the Dragon pattern was the closing of the price on the market above the formed trend line near the level of 12500.

1. Open a trading position to buy at a price of 12520 when the price closes above the high of the breakout bar.
2. Profit target is the 1st swing high prior to the Dragon leg (1) at 12570 and the dragon head zone at 12640.
3. Place a safety stop loss order below the lowest low of the formed 2 legs near the 12410 level.

Figure 3

Inverted Dragon Pattern

This model resembles a "double top". The trading conditions are the same as for the direct dragon pattern. The “dragon hump” is very often formed at a distance of 38-50% from the “dragon head” to its 1st leg. Closing a candle below the formed trend line generates a signal to conclude a trading position for sale.

The closing of the candle below the level of the formed hump once again confirms the formation of the Dragon pattern and gives another signal to conclude a sell deal.

Figure 4

1. You should open a trading position for sale under the formed trend line.
2. Profit target is the swing low that precedes the first leg of the dragon.
3. Place a safety stop loss order above the high of the dragon's second leg.

Conclusions on the forex pattern "Dragon":

Dragon patterns are a variant of 2 tops and double bottoms. These forex patterns allow the trader to find important pivot points on foreign exchange market and predict trend transitions from one to the opposite.

Although dragon chart patterns are quite rare on daily and weekly price charts, they are very common on smaller time intervals, and trading according to these patterns gives a great chance to make a profitable deal.

You can also add additional forex indicators for yourself for greater reliability when trading on it.

Such exotic name received one of the reversal patterns of technical analysis. The “Dragon” pattern is a fairly strong figure that allows you to identify a price trend reversal with a sufficient degree of accuracy.

The pattern got its name due to its visual similarity with the Chinese dragon. In the process of its formation, a dragon's head, front paws, a hump and a tail are isolated (a kind of Loch Ness monster is obtained).

To identify this pattern on the chart is quite simple. Take a look at the picture below.

As you can see, to identify this pattern, four main elements must be distinguished:

• Head
• Front legs
• Hind legs

The fifth element, the tail, appears after the pattern is confirmed by the price breaking through the trend line connecting the dragon's head with its hump. Actually, on the tail of the dragon, traders make their money.

An attentive reader has probably already noticed the similarity of this pattern with another figure in the technical analysis of the market, namely with. Indeed, the "Double Bottom" may be an integral part of the "Dragon" pattern. Or maybe not, because the front and hind legs of the dragon, which make up that same double bottom, can be at different levels. And for the “Double Bottom” figures, it is characteristic that these two characteristic points are approximately at the same level (plus or minus 3-5%).

By analogy with many other technical analysis reversal patterns, there are two varieties of this pattern:

• The bullish pattern "Dragon" signals a reversal from a downward to an upward one;
• The bearish “Inverted Dragon” pattern, indicating a change in trend from an uptrend to a downtrend.

The figure above shows a bullish pattern.

Trading strategy according to the "Dragon" pattern

As mentioned above, the signal that the pattern is complete is the price crossing the trend line built through the points of the dragon's head and hump. As soon as the next candle closes outside this line, you can open a position.

The loss limit level is set just below the dragon's larger paw.

Taking profit when trading on this pattern is recommended to be carried out in two stages. The first one is set at the level of the hump (here you can close the first half of the position), the second TAKE PROFIT order is placed at the level of the dragon's head (here we close the second half of the position).

According to the “Inverted Dragon” pattern, the trading strategy is similar (in a mirror image)

Pattern Confirmation with the Volume Indicator

Like all other figures of technical analysis, the truth and strength of the Dragon pattern can be assessed using the Volume indicator.

The essence of this assessment is that true price movements are always accompanied by an increase in the volume indicator. This means that if the volumes increase in the direction of the dragon's tail (the direction of the future trend) and decrease in the direction of the previous trend, then the future trend is definitely gaining strength and the Dragon pattern is true.

Take a look at this drawing. As you can see, when the price moves from the head to the front paws, the volumes grow, confirming the downtrend that existed at that time. But already with the formation of the dragon's hump, the picture changes significantly. Volumes begin to rise in the direction of an uptrend and decrease in the direction of a downtrend. This indicates an imminent trend change and the truth of the pattern being drawn. Finally, the breakout of the trend line and the price growth in the direction of the dragon's tail is accompanied by a violent surge in the Volume indicator, finally confirming the trend reversal.

The "Dragon" pattern is one of the "exotic" varieties of reversal patterns in the Forex market and, to be precise, it is a more modified version of the “Double Bottom” pattern, while it signals a change from a bear market to a bull market. Accordingly, the "Reverse Dragon" is formed at the end of a growing trend and the beginning of a market decline. The signals of the reverse pattern are similar to the signals during the formation of the “Double Top” pattern.

How does the Dragon pattern form on the price chart?

The Dragon pattern is formed in a falling market. Its formation starts from the Head (1). It represents a local high from a rising one in a falling market. After the formation of the Head of the Dragon pattern, the market continues to decline, as a result of which two lows consistently appear on the price chart (approximately at the same level). These are Dragon Legs.

The local minimum from the first test of the support line at the lower border of the pattern forms the “Dragon's First Leg” (2). The second leg is formed after retesting the same support level (4). The difference between the lows of Leg One and Leg Two can be 5 to 10 percent.

Between the Legs of the Dragon or before the 2nd low, a top should be formed (local maximum - correction from the downtrend), which is called the “Hump of the Dragon”. At its core, the Leg-Hump-Leg formation is a Double Bottom reversal pattern. The height of the Hump is at the level of 38-50% of the height of the Head.

The end of the formation of the Dragon pattern is indicated by the closing of the price above the Dragon Ridge - a trend line (or ) drawn along the points of its Head and Hump.

The formation of the reverse pattern "Dragon" occurs according to the same rules, but in a growing market. The Head and Hump are local lows, and the Legs are highs as a result of testing the upper boundary of the pattern. The formation of the figure is completed after the price passes through the support line, which, as well as for the direct Dragon, is drawn from its Head to the Ridge.

How to trade with the Dragon pattern?

When using the “Dragon” pattern in trading on the Forex market, a position is opened after the end of its formation, that is, after the price breaks through the trend line or the ridge of the 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 is above this line.

For the Dragon pattern in a downtrend, breaking the price of the trend line and closing the Japanese candlestick above this line, signals the trader to open a Buy position.

Today we will consider one of the options for reversal figures - the Dragon pattern. We will study in detail the conditions for its formation on the price chart, what signals it generates for entering the market, and also see practical examples of situations on the market.

In fact, the Dragon figure is a modified version of the Double Bottom pattern and signals a change in market trends - bearish to bullish. The Reverse Dragon, respectively, is formed during a growing trend and the beginning of a change to a bear market. The signals of the pattern are similar to those of the Double Top pattern on the price chart.

How is the dragon figure formed?

The Dragon pattern is formed in a downtrend. The formation of the figure begins with the Head (point 1 in the figure), which is a local price maximum from an upward correction in a downtrend. Having completed the formation of the Head of the pattern, the market continues to further fall in price, which leads to the formation of two consecutive lows on the price chart, which are called the “Dragon Legs”.

The local price low from the first test of the support level forms the “Dragon's First Leg” (in Figure 2). The second leg is formed after retesting the support level (in Figure 4). The difference between the values ​​of the minimums of the 1st and 2nd legs of the Dragon can be 5 - 10%.

Between the "Legs of the Dragon" a local maximum (top) should be formed - a correction from a downtrend. It is called "Dragon's Hump". The “Leg – Hump – Leg” structure, in fact, is a “Double Bottom” reversal pattern, while the height of the Hump should be at the level of 38-50% of the height of the Head point. The completion of the formation of the Dragon figure is indicated by the moment the price closes above the Dragon Ridge line, that is, the trend line passing from the Head to the Hump of the pattern.

The formation of the reverse Dragon follows the same rules, but in an increasing market. In this case, the Head and Hump points are the local price lows, and the Legs are the price highs formed as a result of testing the level of the figure's upper border. The formation of the Dragon is completed after the price breaks through the trend line, which is drawn from the Head to the point of the Ridge.

How to trade in the Forex market using the Dragon figure?

When trading this pattern, a trading position is opened only after its complete formation, that is, after the pattern's trend line is broken. To avoid a false entry into the market on the fact of breaking through the ridge, you should wait until the closing of the current candle is above this line and buy. And, vice versa, for the reverse Dragon figure.

Stop-loss order is placed 10-20 points below the lower border of the Dragon figure. The potential profit on the trade corresponds to the length of the Tail of the Dragon (in points), which is usually equal to the distance from the breakout point of the trend line to the high of the Head. In other words, the size of the Tail will be our potential profit.

When trading on this figure, it is advisable to enter the market simultaneously on several positions. For the first trade, the goal (making a profit) may be more modest, for example, at the top of the Dragon's Legs.

Take-profit for the second position can be set at the Head level. Also, when the price reaches the first target, it is advisable to move the Stop-loss to the breakeven level. Then, when the price reaches the middle of the Ridge, the Stop-loss can be moved to the top of the Legs, which will allow you to minimize trading risks and get the maximum possible profit in the market.

Fibonacci levels can also be used to determine the desired profit taking points. We draw a fibo grid on the Dragon figure on the price chart, starting from the level of the Legs to the level of the Head.

Take-profit in this case can be evenly set at significant Fibonacci levels -38.2%, 50% and 100%.

For the reverse Dragon figure, which is formed on an uptrend, similar conditions and rules for opening trading positions, as well as their maintenance, apply, but only for sale (picture below).

There are also additional signals that allow you to filter out false signals of the Dragon pattern:

formation of a reversal bar or candlestick;

increase in trade volumes.

You know that a momentary reversal of the main trend in the market is very rare. As a rule, it is accompanied by repeated formation of highs or lows in the same price range. The Dragon pattern allows you to open a trading position at the beginning of a new trend, which allows us to enter the market with a minimum risk/reward ratio.

In addition, the Dragon figure is found on the market more often than the "Double Bottom" and "Double Top", and is also formed on any timeframes. Therefore, you can use the Dragon pattern in both long-term and short-term trading.

The negative point in trading the Dragon pattern is that such figures are formed relatively rarely on price charts.

However, this does not mean that this pattern should be ignored. On the contrary, it definitely needs to be used, since such figures are efficiently processed. Be more vigilant when tracking this pattern.

Hi all. I got acquainted with the Dragon pattern relatively recently. More precisely, relatively recently, I learned the name of the model that I saw and successfully traded on Forex for more than one year.

If you are constantly studying the markets, then you should be aware of the situation when you find a certain pattern, test it, and after you understand that it works, you begin to implement it in your trading, bragging to others, saying that I am smart, I found a cool trading formation.

But, I keep repeating this, everything on the market has been invented a long time ago and the task of modern traders is to take the existing developments and delve into the essence of the pattern, and then start applying it in their trading.

I can’t say exactly when and by whom the Dragon pattern was invented, if anyone knows, maybe they read it in books, share the information, but there is no doubt that the formation is working.

How the Dragon pattern is formed

Unlike the above examples of candlestick analysis combinations, which are formed from one, maximum three candles, in the case of the Dragon, you will have to be patient.

To be honest, I really like these patterns. Take, for example, the excellent Head and Shoulders pattern. At the time of the formation of the head, I can already guess what kind of movement will follow and if my expectations are justified, in addition to profit, I will receive additional, moral pleasure.

In the case of the Dragon, everything is similar. The pattern has well-known points, without which the formation is not possible:

• Head.
• Right leg.
• Left leg.
• Hump.
• Tail.

Each of the points must be located in the allotted place, without distortions and various force majeure.

The Dragon pattern is a reversal, bullish pattern in the Forex market.

To be able to trade the formation, you should know the following important data:

• On a downtrend, the last local maximum should be identified, this point will be the head of the Dragon.
• After that, the market continues its fall and reaches a certain level, below which it cannot go. This point will be the left foot.
• The hump of the Dragon is a corrective movement from point 1 to 2. It is important that the correction ends no higher than 38.2% - 50%.
• After the expected correction, the market should try to break through the lows again. The ideal option will be a failed attempt. The logic here is that since the bears cannot push through the low, it means that their strength has run out and if the bulls join in and try to seize the initiative, you can open purchases.
• From the head to the hump, we lay a trend line. This line will be signal. As soon as the trend line breaks out, the Dragon pattern is formed and you need to open Long.
• StopLoss is set below the dragon's legs.
• The first target is the level of the hump, the second target is the head, and we set takeprofit on them.

• An alternative is a situation in which the bears manage to lower the market below the first leg. For me personally, this nuance weakens the pattern. In this case, I think this way: since the bears managed to update the lows, it means that they are not so weak and you need to be more careful with purchases, but the classic description does not exclude this option, which I am telling you about.

The bullish Dragon reversal pattern has its mirror image in the form of a bearish Inverted Dragon reversal pattern. Everything that was said above about the bullish model is identical for the bearish one, so I don’t see the point in telling it for the second time.

The Dragon pattern has amazing implementation statistics. I already wrote that just as candle combinations get their names because of the similarity with real, life examples, the Dragon was also named for a reason.

On purpose, on the screen below, I put a graph on ..., well, you understand. See what happened.

As for me, the similarity is not something that can be traced, it is on the face. There is an elongated head, right and left legs, and a tail, of course.

To the question of correct identification on the chart. Absolutely any reversal combination in Forex should be based on something. It is not for nothing that they write in books that the figure formed at the very bottom of the market. Of course, where the bottom is now, in an hour it may not be the bottom at all, but you should still follow the rules.

The idea of ​​determining the bottom of the market is to identify the levels from which the market has bounced before. It is believed that if the price bounced off a certain price in the past, it is likely that there will be a rebound from this price in the future. Based on this logic, one should start searching for some graphic figure, and in this case the Dragon, only if the price approaches the support level (for a bullish figure) or resistance level (for a bearish figure).

To eliminate the false finding of patterns, a small instruction will help:

1. The formation of the figure begins with finding the current trend movement (described in detail how to do this) (with a downtrend, we are looking for a dragon, with an uptrend, an inverted dragon).
2. The probability of a price reversal is higher at important levels. No level, no reversal.
3. The hump of the dragon should not be higher than 38.2% - 50% of the distance from the head to the left leg.
4. The right leg should be located 5 - 10% from the left leg. Ideally, if it is higher, but it is allowed Alternative option in which it is lower than the left leg.
5. In the event of a breakdown of the trend line, do not rush to open a deal. Assess the potential and weigh it against the expected loss. If there are no complaints about this item, open a deal.