Among others a good example of such is the dragon harmonic pattern.
The dragon pattern, similar to other harmonic patterns, is crucial for chart analysis. It allows traders to recognize and understand patterns. In turn, these patterns could form the basis of a profitable trading move.
Read on to learn more about dragon pattern technical analysis. Find out what it means, including the identification of bullish and bearish indicators. You’ll gain valuable insights that can help facilitate the right decisions.
What Is a Dragon Harmonic Pattern?
The name itself can already give you an idea of the dragon pattern. As the name implies, it looks like a dragon on the chart. It is quite similar to the W or double bottom pattern.
Further, it has five elements that give the illusion of a dragon — the head, two feet, a hump, and a tail. Recognizing the pattern at first can be challenging, but once you know the specifics, it will be easier to identify its presence.
The most common instance when you can see the dragon pattern is when the market is on a downtrend.
How Do Dragon Pattern Work?
The starting point of the dragon pattern is its head. This is also the highest point. After its formation, the price declines, forming two legs or feet. In most instances, there is a 5 to 10% difference between its feet.
Meanwhile, the second leg in the pattern can demonstrate a strong reversal. Between the two feet or legs is a higher point that forms the hump of the dragon. Its height is about 38 to 50% of the dragon’s head.
The last on the pattern is the head. This is also recognized as the start of the decline of the market.
What is the Bullish and Bearish Dragon Pattern?
Like other technical indicators, the dragon harmonic pattern indicates market conditions.
The bullish dragon pattern works like the W-bottom pattern. In most cases, it will form when the market is at its bottom. Hence, it can be a buying signal since it shows that the prices are good to enter the market.
On the other hand, a bearish dragon pattern is a failed double top or M pattern. It’s also often called an inverted dragon. It is often seen during a time when the market is at the top. This pattern could be a signal of sales.
Trading the Dragon Pattern
More than recognizing the actual pattern, it’s crucial to know how you can use it for trading. This way, you can time your strategies perfectly, which might yield good gains.
One of the things the dragon pattern can indicate is trade entry, so you’ll know if you should already invest. The best time to do this is when there is a middle swing high at the level of the hump.
Using the relative strength index can help confirm your market entry.
More so, you can also use the dragon pattern for setting a stop-loss to manage the risks in your investments. This should be done when the two low swings are at their lowest point.
As you use the dragon pattern for trading, pay attention to the trend line. The latter runs from the dragon’s head to the hump. The line should be visible, or else you should not continue using the pattern.
How to Detect the Dragon Pattern
The first point in the dragon pattern is its head. It starts at a high point and gradually declines.
After the head, you’ll see two feet at the bottom. These represent the two consecutive lows of the market.
Meanwhile, between the feet, there’s a hump. It shows a reversal double bottom.
Lastly, the last part is the head, which is what closes the trend line.
