Technical analysis can help you spot a market reversal quickly by using patterns. Double Top and Double Bottom are two strong patterns. W-top or M-top?

The market doesn't usually reverse with one strong move in the opposite direction. It forms a reversal trend to get started.

Some traders use classical reversal patterns as well as modernizing the identification and trading rules for existing structures. The Dragon pattern is one example.

Although the Dragon pattern is very similar to a Double Bottom, it has some unique rules that make it distinct and separate from other patterns. It does not have a traditional price structure. The Dragon pattern can be traded in a variety of time frames, and traders will find it attractive because it has a low risk to profit ratio.

This article will discuss the differences between a Dragon and a Double Bottom, as well as the rules for trading, profit taking levels, and exiting the market if needed.

Structure of a Bullish Dragon

Let me tell you right away that there is a pattern. A pattern at the bottom of a market signals to buy. And a pattern at top of market suggests selling. The pattern appears to have a W-shaped top, as mentioned previously. Take a closer look at the structure.

The Head is where the Dragon forms for the bearish market. This is the first movement between the pattern's local high and low.

The point becomes the Left Paw when the price reaches its lowest.

The price rises, but does not break through 38.2-50% Fibo from the Head to Left Paw.

This peak is known as the Back of the Dragon. This correctional level must not be exceeded. You can skip any irregularities found in the pattern. The trader doesn't need to determine where the peak is in the classic pattern. This could be the difference between Double Bottom and Dragon.

The next drop can be between 5-10%. This is the Right Paw. This is a different from the Double Bottom. Both lows must be on the same level.

The Dragon is complete when the price begins growing from the second Paw of the pattern. According to the author, there are candlestick reversal combinations and divergences on technical indicator that can provide additional signals to open a trade.

Different traders have different opinions about the Right Paw. Some say it works better when it is lower than the Left Paw, while others believe that it is slightly higher than the Left Paw.

The Tail is the price movement that moves from the Right Paw upwards. The trader must then find the points where he can profit from the pattern.

Structure of the bearish dragon pattern

Let's now move on to the bearish Dragon. This one is very similar to a Double Top. Let's take a closer look at the structure.

The Head point is where the Dragon forms in a bearish market. This is the first movement between the local low and the top of the pattern. The decline will start later.

The Left Paw is formed when the price reaches a high point and then pushes down.

While the price is falling, it remains within the Fibo correction range of 38.2-50%. Here is where the Back of the Dragon needs to form.

The Next Upward Movement from the Back can be 5-10% higher or lower than that of the Left Paw. This is where the Right Paw should be formed. If you're used to trading more conservatively, start looking for aggressive entry points.

The so-called Tail of the Dragon is a downward movement that follows. Here are the points to profit from the selling of the pattern.

How to open a position using the Dragon pattern?

The author suggested that they look for opening signals on their Right Paw in their first work. However, later breakaways of trendlines were considered strong entry signals.

The small risk of opening a position while the second paw forms is far greater than the potential profit. This is a great opportunity for aggressive traders to open positions with minimal Stop Loss.

Draw the trendline starting at the Head and ending at the Back of Dragon. If the price closes above this line and there is, for instance, a divergence in the MACD, then this will be your second signal to open your positions by the pattern.

The third signal is a breakaway of the Pattern's Back. This ranges from 38.2-50% of correction between the Head and the Left Paw. The trader expects a horizontal breakaway. This signal is very similar to the Double Top or Double Bottom patterns.

Three stages can be seen on a bearish chart:

1. When the Right Paw forms, open the position. This position is aggressive because the pattern is still incomplete and the reversal has not been confirmed. A low risk-to profit ratio is appealing.
2. The second position should be at the breakaway of the trendline. This is where you will draw the extreme points of the Head or Back of the Dragon. This trade is more conservative. This pattern is nearly complete and there is confirmation by a breakaway from the descending trendline.
3. The third position should be opened at the Breakaway of the Back of the Dragon. This trade is very cautious and carries a higher risk to reward ratio.

How do you set goals for the Dragon?

The classic W-shaped and M shape use the height of the pattern as the goal. To set the goals for profit, the Dragon uses Fibonacci levels. You can choose to place the Take Profit option on any of the three levels.

1.The Head to the Left Paw is the first goal.

2. The second goal is 100% correction. This point corresponds to the Head level.

3. The third, and most optimistic goal, is between 1.277% to 1.618% from Head to Left Paw.

What is the best place to put a stop loss?

This pattern's Stop Loss is set below one Paw. The SL should be placed below the Paw that is on the Left. If the Right Paw is higher than the Left, place the SL at the lower end.

Simply put, the SL should be placed below the low point of the bullish or above the high point of the bearish patterns.

Example of opening a position with the Dragon

Let's look at the GBP/CHF example to see how it works. We can see that a bearish Dragon pattern is developing. As such, we have the Left Paw as well as the Back. The Right Paw of this pattern is dropping, so we can look for a signal that it is time to sell. This is a good place to start a trade. Place a Stop Loss above 1.2555, i.e. Above the left paw's highest point.

We can then assume that the ascending trendline will break away at 1.2460, which will be the second entry point. The third selling position will be the Breakaway of the Back at 1.2410.

The first profit is taken when the price reaches 1.2390-1.2346. The second one is at 1.2290. The third one is between 1.2222-1.2130.

Bottom line

The Fibo chart shows the Dragon pattern as an improved version for classical reversal patterns. We are provided with more exit options and entry points by the author. Classic patterns have only one goal and one entry point. The Dragon trader has three entry points. One can be aggressive or more cautious. There are also three exit options. Each option comes with different profit margins.

This pattern is versatile and can be used in a variety of time frames. You can find the best pattern by following the trend.

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