What is the Dragon Pattern?
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    What is the Dragon Pattern?
    Dragon Pattern – Using Dragon Patterns for Technical Analysis

    The Dragon pattern is an intriguing and exotic form of harmonic pattern that often serves as a technical analysis reversal model in trading. It has a head, two feet, and a tail. It resembles the 'W' pattern or the double bottom pattern. It is, in effect, a failed double bottom pattern. The design is called a Dragon pattern because it resembles a dragon.

    In a falling market, the dragon pattern normally forms. This pattern is applicable to all time frames and offers outstanding trading conditions with favorable risk/reward ratios. In addition to dragon patterns, there are inverse dragon patterns (bearish) and ‘M' patterns (failed double top patterns). The reverse dragon pattern orders are identical but in reverse.


    The Dragon Pattern's Formation



    The dragon pattern begins with a head. The price then dropped from the swing high level to the swing low level, becoming the first leg of the Dragon. The price continues to fall from the head level, resulting in the creation of the two legs of the dragon or the two lows. Following the first leg, the price rises. The increase is normally between 38% and 50% of the previous swing, creating the dragon's "hump." The price gap between the two legs is 5-10%. The second leg clearly suggests a trend reversal. The completion of the second leg indicates the possibility of a Dragon formation. Following the price increase on the second leg, there is normally a spike in volume.

    Any momentum-based indicators should display main reversal bars or a divergence in the price action from the second leg. Traders join the trade after the second leg is completed.


    Trading the Dragon Pattern

    Draw a trend line from the dragon's head to the hump. Wait for the second leg to be completed. When the price closes over the trend line, the second leg has been completed. Join a long trade until it has been confirmed. Divergence in any momentum-based oscillator, such as the RSI, will confirm a clear reversal in price action. To be certain, wait for a candle or bar closing price that is higher than the trend line. When the price closes over the hump level, certain traders join the trade.


    Setting Stop Loss and Target Price

    Let the stop loss below the lower of the two swing lows. Set the first goal at 61.8 to 78.6 percent of the swing range from the head to the first leg determined from the second leg level. Put the second target to 100% of the swing range, and the third target range to 127.2% to 161.8% of the swing range. When the price hits the first target, we suggest adjusting the stop loss to break even to reduce risks.

    Fibonacci levels may also be used to determine take profit levels. To do so, add the Fibonacci grid to the dragon pattern from the feet to the head. The aim values will then be set at significant Fibonacci levels such as 38.2 percent, 50%, and 100%.


    How to Trade Your Dragon

    Technical analysis provides traders with many trading opportunities in the form of trends, periods, and indicators. A strong framework and a well-designed and verified rules-based trading technique are needed for successful pattern recognition and execution. The “Dragon” chart pattern provides a perfect chance to benefit with a simple structure and trading rules.

    The “Double Top” or “Double Bottom” pattern is one of the most powerful and fundamental patterns in technical analysis. Most traders are familiar with the principles of double tops and double bottoms (or “M-Tops” and “W-Bottoms”), but their formations, rules, and trading features vary somewhat.

    Markets rarely move from bearish to bullish after a set of market action sequences testing support and resistance levels. Major market bottoms and tops entail a sequence of turning points (swing peaks in M-Tops or swing lows in W-Bottoms), accompanied by some congestion before determining a trend or counter-trend trajectory from previous movements. The Dragon pattern illustrates these turning points and offers a rule-based trading technique for them. Dragon variations can be used in both time frames and market tools.


    The Dragon Framework

    The “W-bottom” pattern is identical to the bullish Dragon pattern. Inverse Dragon (Bearish) patterns are identical to “M” patterns. Bullish Dragon patterns typically form at market bottoms, while bearish Dragon patterns typically form at market tops. Dragon trends are applicable to both time frames and business tools. The rules for the "Bearish Dragon" are changed.

    Dragon patterns, like most double bottom patterns, provide outstanding trading opportunities with favorable risk/reward ratios. The Dragon pattern begins with a “Head” shape as price falls from the swing high level to the swing low level, becoming the first leg of the Dragon. A swift reversal from this swing low (1st leg) on an attempted rally to 38 percent to 50% of the prior swing creates a main swing high or hump level. A second swing low is formed by another retracement from the hump stage (2nd leg). The completion of the second swing low indicates the possibility of a Dragon formation. This two swing lows (legs) are normally formed within 10% to 15% of the price gap. Any momentum-based indicators should display key reversal bars or a divergence in the price action from the second swing low. In the second leg, there is normally a spike in volume. Trades are entered after the second swing low has been reached, and goals are set in the tail portion of the Dragon pattern (see “Dragon tails,” below).




    Trade entry

    A trend line is traced from the Dragon's head to the center swing high at hump height. The first trade entry (long) is made after the second leg is done, which is confirmed when the price closes above this trendline. Divergence in any momentum-based oscillator indicator, such as the relative strength index, may also confirm a strong reversal in price action. When the price closes over the hump level, a more cautious long trade (second trade) is reached. Stops should be set below the lower of two swing lows.


    Targets

    The first goal range for a bullish Dragon trade is set at 62% to 78% of the swing range from the head to the first leg determined from the second leg stage. A second target is set at 100% of the swing range, and a third target range is set at 127% to 162% of the swing. When price begins to climb toward target levels, it could be best to swap these trends with trail stops.


    Classic Strategy



    The “Dragon” can be both bullish and bearish, and the rules for trading with them are similar. As a result, in order to save time, we will just describe the strategy for the bullish pattern.

    A trend line should be traced from the pattern's head to its hump, according to the classic strategy. You will reach the market when the price crosses this line.

    At the point where the price hits the trend line, enter the market. Our first goal is to make a profit of $1. Place a Take Profit order at the highest point position of the hump.

    Take Profit 2 is our second goal, which is located at the pattern's head level. Stop Loss is set above the height of the "Dragon's" larger foot.


    Nuances of Trading with the Forex Dragon Pattern

    The length of a "Dragon's" feet. According to various sources, the first foot would unquestionably be longer than the second, but we think the reverse is true: as the trend is emerging with the second foot becoming longer, the demand shift has a greater capacity.

    The trend line (from the pattern's head to the hump) should be easily visible; otherwise, it makes no sense to proceed with the pattern analysis. The "Dragon" has two opposing patterns. This is clearly shown in the images:




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