Forex Strategies Resources

14 # The Dragon Pattern Forex Trading System

Submit by Janustrader, (author Suri Dudella)

 

The Dragon pattern is similar to the ‘W’ pattern or the ‘Double Bottom’ pattern with a few different trading rules and targets. Inverse Dragon patterns are similar to ‘M’ pattern. Dragon patterns usually form at market bottoms. Dragon patterns work in all timeframes and in all market instruments. Like most ‘Double Bottom’ patterns, Dragon patterns present excellent trading opportunities with low risk to reward ratios. The Dragon pattern starts with a ‘Head’ formation and price declines from the head level to form two legs of the Dragon. These two legs 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. A spike in volume usually follows the price rise of the second leg. A trend line is drawn connecting the head of the Dragon to the hump. When price closes above the trend line and is confirmed by price action or divergence in any oscillator, it signals a reversal.


The second confirmation of the Dragon pattern occurs when the price closes above the hump, which is 38% to 50% of the range or the Swing High/Low between the two Dragon legs (or peaks for Inverse Dragon) from head to the low of the first leg.

Anatomy of a Dragon Pattern

A. Head of the Dragon

B. Formation of first leg

C. Hump (must be 0.38 to 0.5 of AB)

D. Second leg (can be 0.618 to 1.27 of

AB)

 


E. Trend line breakout (Long Trigger)

F. First target at 1.27 of CD

G. Second target at 0.886 to 1.0 of BC

H. Third target at 1.38 of AB

I. STOP: Place a stop few ticks below

the lowest low of two legs.

 

Trading Dragon Pattern

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

 

1. Enter a long trade at 12,520 on the close

above the high of the breakout bar.

2. Target the first swing high prior to

leg (1) at 12,570 and ‘head’ area at

12,640.

3. Place a stop order below the lowest low

of the two legs at 12,410.

 

Trading the Inverse ‘Dragon’ Pattern

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

another short trade.

1. Enter a short trade below the trend

line.

2. Target the swing low prior to the first

leg.

3. Place a stop order above the high of the

second leg.

 

 

Conclusion

The Dragon pattern is a variation of the Double Bottom or Double Top patterns. These patterns show significant market

turning points and major market shifts. Even though Dragon patterns are relatively rare in daily and weekly charts, they do appear quite often intraday and have high success rate. They could be studied further with other indicators and patterns for more reliability.

References

1. Trade Chart Patterns Like The Pros by

Suri Duddella.

2. Technical Analysis and Stock Market

Profits by Richard Schabacker

 

 

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