Dragon figure. Formation. Structure. Targets.

6 oct 2019

“Dragon” is a reversal pattern that indicates almost the very beginning of a trend reversal. The formation of the Dragon tells the trader that market sentiment may change soon and the current trend will unfold.

The figure is a more modified version of the "Double bottom" or "W" shape, while it signals the change of the bear market to the bull market. But there is one fundamental difference from the “Double Bottom” figure.
A prerequisite for the formation of the Dragon is a trend line drawn through the head and hump of this model ("Dragon Ridge").
It is important that this trend line is clearly visible on the chart. The trend line plays an almost decisive role in the figure.

“Dragon” and “Inverted Dragon” with the correct identification and understanding of the work, you can get good profit on various time frames.
The figure “Dragon” and its mirror image “Inverted Dragon” are very similar to the figures “Double top” and “Double bottom”, however, they also have significant differences, which will be described below.
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There are two types of this figure, depending on the trend:

1) “Dragon” - is formed during a downtrend and signals a trend change to an uptrend;
2) “Inverted Dragon” - is formed during an uptrend and signals a trend change to a downtrend.
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The figure "Dragon" got its name due to some similarities with the fairy-tale character: he also has a head, two legs, a tail and a hump on his back.

The figure "Dragon" consists of 5 parts, formed in the following order:

1) Dragon Head - the maximum price of all parts of the figure;
2) The first paw of the Dragon - a local minimum price;
3) The Hump of the Dragon - the maximum price between its paws;
4) The second paw of the Dragon is another minimum located slightly below / above the first paw, in rare cases equal to the minimum of the first paw;
5) Dragon Tail is the target price that should bring you revenue.

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Additional signals that confirm the trend reversal and enhance the development of the "Dragon" figure:

1) The ratio of the length of the "dragon's paws" - if the "second paw" is longer, then there is more confidence in the upcoming turn.
2) When the level of the "second paw" coincides with some important level of support / resistance, already tested in the past, this also enhances the development of the figure.
3) Candles are strongly pronounced (large bodies with short shadows) that have gone in the opposite direction after the formation of the "second paw", the greater the likelihood of a change in the current trend.
4) The more a trend exists, the more likely it will end. The “Dragon” pattern is often in the 5th wave of the trend and in this case the reversal signal is very reliable.
5) An additional confirmation signal can be an increase in the indicators of the trading volume, which should increase during the break through the price of the downward trend line of the “Dragon” figure (resistance). This is the line drawn from the top of the Dragon Head to the bottom of the Dragon Hump.
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Setting goals when working with a figure.
There are two options for entering a deal:
1) Entrance when breaking the line of the "Dragon Range" of the downtrend (line- "Head" - "Hump").
2) Entrance when breaking through the "Hump of the Dragon" level.

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Now you need to decide on our targets:

The first targets will be at the level of the last maximum - the level of "Hump".
The second target will be at Head level
The third target is, in rare cases - the full length of the fall from the “Head” to the lowest “Paw” - then from the breakdown point of the downward trend line (“Dragon Ridge”) we set the entire length of the last price
See the chart above. The graph shows that it was the Third Goal that worked completely on the graph.