DRAGON TRADING PATTERN

Introduction
A dragon pattern is a “W” or “M” shape reversal pattern which resembles a Chinese dragon. This pattern
indicates that in the near future, the market is about to face a price reversal. This reversal is either bullish
or bearish. The bullish and bearish nature of the dragon depends on the shape of the dragon.
This blog will address both types of dragons concerning the trading strategy.

Components of a dragon pattern

There are four important components of a dragon.
• Head
• Feet
• Hump
• Tail
1. Head
The head of the dragon is the begging of the dragon pattern. It indicates the prior trend. In the case of a
bullish dragon, the prior trend is bearish. On the other hand, a bearish dragon forms above a prior bullish
trend.

2. Feet
There are two feet of the dragon. The positioning of the feet is so the second foot is a little below the first
foot. If the second foot is bigger in size, the reversal is usually greater.
In the case of a bearish dragon, feet are formed in the inverted position as the dragon’s body is reversed.

3. Hump
It is a slight rise in the prices compared to the feet of the dragon. It is located between two feet but at a
higher level in the case of a bullish dragon. In the case of a bearish dragon, the hump is below the feet.

4. Tail
It is the last point of the Dragon’s body. It is the point where a breakout in the market takes place. In the
case of a bullish dragon, the price begins to rise after the formation of a tail. The market begins to take
new highs, and the bullish sentiment takes place. It is the time when the number of buyers begins to take
over the market.
In the case of a bearish dragon, a bearish breakout takes place after the tail of the dragon. In this case,
the number of sellers dominates a market and prices begin to face a fall.
Types of Dragons
Two types of dragons appear on a trading chart. Both these types behave oppositely regarding a market
reversal. The types of dragons are,
• Bullish dragon pattern
• Bearish dragon pattern

The comparison between these two types is given below in the table.
 Features

Bullish Dragon

Bearish Dragon

It resembles the letter It resembles the letter

“W.” “M.”

shape

Prior trend bearish bullish

Market breakout Bullish breakout Bearish breakout

Bears begin to dominate

The number of buyers
the market as the
Forecast begins to take over the
number of sellers
market.
increases.

Trading strategy
As you are aware now that there are two types of dragon setups. So, we need to form two types of
trading strategies.
Trading strategy for a bullish setup
The trading strategy for a bullish setup is divided into the following steps.
• Entry
• Take profit
• Risk management

Entry
After the formation of the second foot of the dragon, the bullish dragon is confirmed. The best time to
enter a trade is once the bullish sentiment of the market begins to appear.

To find the best entry point, draw a trendline that passes through the head, hump, and the point after the
second foot. This point forms an ideal entry point. Later to this entry point, the prices take a slight dip,
and the bullish break out takes place.
Take profit
Two options exist for taking the profit if dealing with a bullish dragon pattern. Suppose you are more
interested in short trading. you can take a profit just above the tail of the dragon, equivalent to the head
or equivalent to the Hump, when prices begin to rise.
In a long trade, you have to wait for a breakout in the prices. Usually, the prices take a spike after a
bullish dragon appears. The more patient and professional traders wait for the full spike to take a
significant profit.

Risk management
Risk management is a vital step when trading a bullish reversal dragon. I recommend you place the stop
loss below the second foot of the dragon. It will significantly protect your potential losses if the dragon
doesn’t behave as usual and the price reverses.
Draw the dragon pattern with proper Fibonacci levels:
Hump near 38-50% of AB. Input Parameter : Hump Ratio = 38.
Second leg can be 68-100% of AB. Input parameter: Second Leg Ratio = 68%
Both are configuration.
Input parameter : Multi-Target = true
Close 25% of the position at Target 1
Close 25% of the position at Target 2
Close 50% of the position at Target 3
Input parameter : Multi-Target = false
Close 100% of the position at Target 3
MT4 indicator should draw the dragon pattern for Symbol and time frame like below
Note: Exact same information has to be displayed and lines.
Alert:
When symbol found, alert with symbol name, time frame, entry price, stoploss price and target price.
When entry happened, triggered the alert.
When stop loss hit, triggered the alert with symbol name and timeframe.
When target hit, triggered the alert with symbol name and timeframe.

Input Parameter:
enable timeframe: 1M | 5M | 15M | 1HR
Note:
1. Should not get REPAINTED, meaning if the pattern is identified for a ratio and its broken then we
should not change that.
2. Draw the pattern only when the trendline broken.
3. If multiple time frame enabled draw those and track also.
4. Raise the alert specific to the pattern on each level.