A head two feet a hump between the feet and a tail and it's visually similar to the Chinese dragon.
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| Dragon Chart Pattern |
The dragon pattern starts with a head formation and then the price declines
from the head and the two legs of the dragon forms the second leg lower than
the first leg and then the price advances from the second leg and the tail of
the dragon forms.
There is a hump between the feet and the tail, so that we can draw a trend line
from head of the pattern to the highest point of its hump and actually breaking
of this line triggers a trade entry now you may think why we should conclude
that this is a reversal pattern and the price is possibly going to advance.
Why not concluding that we are in a downtrend and the price is going to decline more there are two other signs that complete this pattern and actually gives indications of possible reversal and we must look for them in the second leg of the dragon the first one is volume in the second leg when the price rises we must see increased volume actually greater amount of volume in compared to here where the price is falling you can see that here the price is falling in the direction of the trend but the volume is gradually decreasing but in this part of the leg.
Where the price is rising you can see how the volume increased and this shows that while we are in a downtrend being interest is increasing because of the reason the market participants are showing more interest to buy and this is reflected on the trading volume as you can see and the second sign that we must look for is increased upside momentum for discovering this we can use a momentum oscillator like macd or rsi or any other momentum oscillator you prefer and we must have a divergence between the price and the momentum oscillator.
Above shown in fig, In
this case it must be a bullish divergence which means that as you can see the
price has formed lower low but the momentum oscillator has formed higher low
and this shows that we have decreased downside momentum and the upside momentum
is gaining strength so now our dragon pattern is complete and it gives us some
indications that the price may change its direction and a reversal may possibly
happen we must wait for the price to break this line actually a break out of
this resistance line confirms a buying signal or opening a long position
ideally we must see significant increase in the volume on the breakout or at
least average or above the average volume so when the price closes beyond this
line with acceptable amount of volume it confirms the buying signal or opening
a long position and the stop loss for this trade should be placed here below
the lowest low and for the profit target if you intend to take short-term
profit based on this pattern you can exit your position.
When the price reaches to the head of the pattern and if you intend to stay
longer in your position in other words you want to ride on the trend and get
the most out of it you can watch and analyze the price action carefully and ride
on the trend until you have signs of increased selling pressure and possibility
of ending for the trend in order to save time.
Conclusion :
Dragon
pattern can be both bullish and bearish and whatever i just explained about
this bullish pattern is true and applied for the bearish one but in the opposite
direction actually the rules of trading with them matter each other this pattern
and trading strategy can be used on any time frame and they can be analyzed
further with other indicators and patterns and discovering confluences between
them for more reliability.
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