Dragon Pattern

The “Dragon” pattern is similar to the ” W pattern or the “Double Bottom” pattern with few different trading rules and different targets. “Inverse Dragon” patterns are similar to “M” pattern. “Dragon” patterns usually form at market bottoms. Dragon patterns work in all time frames and in all market instruments. Like most “Double bottom” patterns, “Dragon” patterns present excellent trading opportunities with low risk to reward ratios.

The “Dragon” patterns start with a “Head formation and price declines from the head level form two legs of the “Dragon”. These two legs in a “Dragon” pattern usually form within 5% to 10% of the price difference. The second leg has a strong indication of reversal as it posts a key reversal bar, or a “divergence” in any oscillator indicators. The price rise in the second leg is usually followed by a spike in the volume. A trend line is drawn connecting the head of the “Dragon” to the hump. When the price closes above the trend line and confirmed by price action or divergence in any oscillator, it signals a reversal. The second confirmation of
“Dragon” occurs when the price closes above the hump, 38% to 50% of the range from head to the low of the first leg.

Trade: Aggressive traders enter a “long” trade when the price closes above the trend line. A better trade entry may be signaled when the price closes above the hump level. Enter a “long” trade few ticks above the hump level.

Target: Targets are usually at 127% of the second leg range and another target is set at near the “head level.

Stop: Place a “stop” order below the “lowest low” of the two legs.

Trading Dragon Pattern

Trading Dragon Pattern

Head
Formation of “first leg.”
Hump (must be 0.38 to 0.5 of AB).
“Second leg” (can be 0.61 8 to 1.27 of AB).
Trend line “breakout” (Long Trigger).
First “target” at 1.27 of CD.
Second “target” at 0.886 to 1.O of BC.
Third “target” at 1.38 of AB.
STOP: Place a stop few ticks below the lowest low of two legs.

Trading Dragon Pattern

Trading Dragon Pattern

The example above shows a “Dragon” pattern formation from the Dow Emini futures 30 minute chart. On January 3,2007, Dow futures formed the head of the “Dragon.” Prices declined until January 8th in the first leg formation. On January 8′” prices tried to recover as they rallied to 12520. A trend line is drawn connecting the “top” of the “head” and “top” of the first leg. On January 10th, the second leg was formed as prices retraced from the hump area to 12420. A confirmation of “Dragon” is first signaled when prices closed above the trend line at 12500.

Enter a “long” trade at 12,520 (close above the high of the breakout bar).
Target the first “swing high” prior to leg (I) at 12,570 and “head” area at 12,640.
Place a “stop” order below the lowest low of the two legs at 12,410.

Trading Inverse Dragon Pattern

Trading Inverse Dragon Pattern

The “Inverse Dragon” is an upside down “Dragon” pattern and its trading rules are similar to “Dragon” rules. The “Inverse Dragon” is a rare, but a very reliable pattern. The “Dragon” pattern starts with a “head,” “hump” and two “legs” (inverse). The hump area is usually at 38% to 50% of the range between the “head” and the first “leg.” A “close” below the trend line triggers the first “short” trade. A “close” below the “hump” line to trigger another “short” trade.

Enter a “short” trade below the trend line.
Target the “swing low” prior to the first “leg.”
Place a “stop” order above the highest high of the two legs.

Trading Inverse Dragon Pattern

Trading Inverse Dragon Pattern

Inverse Dragon is an upside down “Dragon” pattern with trading rules similar to “Dragon” rules. The hump area is usually formed at 38% to 50% of the range between the “head” and first “leg.” A close below the trend line triggers the first “short” trade. A “close” below the “hump” line confirms the “Dragon” and signals another short trade.