Trading Dragon Chart Patterns by Suri Duddella The Technical Analysis arena provides plenty of trading opportunities for traders in the form of patterns, cycles, and indicators. Successful pattern recognition and execution must consist of a strong framework and a well designed and tested rule based trading methodology. In this article, I would like to describe one of my favorite chart patterns called ‘Dragon’ with a pattern recognition framework and its trading rules. One of the most powerful and basic pattern in Technical Analysis is ‘Double Top’ or ‘Double Bottom.' Most traders are familiar with the concepts of ‘Double Tops’ and ‘Double Bottoms’ or ‘M-Tops’ and ‘W-Bottoms.’ However, all of these patterns have slight variations in its formations, rules and trading characteristics. Markets rarely transition from bearish mode to bullish mode without going through a series of price action sequences to test support and resistance areas. Major market bottoms or market tops involve a series of turning points (Swing Highs in M-Tops or Swing Lows in W-Bottoms) followed by some congestion before picking a trend or counter-trend direction from prior moves. The Dragon pattern highlights these turning points (Swing Lows and Swing Highs) and provides a rule-based methodology for trading them. Dragon patterns are visible in all-time frames and all market instruments. Dragon Framework The Dragon (Bullish) pattern is similar to the ‘W’ pattern or the ‘Double Bottom’ pattern. Inverse Dragon patterns (Bearish) are similar to ‘M’ pattern. Bullish Dragon patterns usually form at market bottoms, and Bearish Dragon patterns form at the market tops. Dragon patterns work in all time frames and all market instruments. Here I will describe how a 'Bullish Dragon' is developed and traded. The rules for 'Bearish Dragon' are similar but in reverse direction. Like most ‘Double Bottom’ patterns, Dragon patterns present excellent trading opportunities with great risk to reward ratios. The Dragon pattern starts with a ‘Head’ formation as price declines from the swing high level to a swing low to form the first leg of the Dragon. A quick reversal from this swing low (1st leg) on an attempted rally to 38-50% of prior swing forms a key swing high or 'hump' level. Another retracement from hump level forms second swing low (2nd leg). The completion of second swing low signals a potential dragon formation. These two swing lows (legs) usually form within 10-15% of the price difference. The price-action from second swing low should show key reversal bars or a divergence in any momentum based indicators. A spike in volume usually follows in the second leg. Trades are entered after completion of 2nd swing low (2nd leg) and targets are placed in the tail section of the Dragon pattern. How to Trade a Bullish Dragon Pattern Trade Entry A trend line is drawn connecting the head of the Dragon to the middle swing high at hump level. After 2nd leg completion, when price closes above this trend line strong reversal price action or divergence in any momentum based oscillator indicators (like RSI), first trade entry (long) is entered. A more conservative trade long entry (second trade) is entered when price closes above the hump level. Stop: A Stop is placed below the lowest low of two swing lows (legs).
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