In the technical analysis of infection patterns that allow timely recognition of market reversals. It is believed that "Double Top" and "Double Bottom" patterns occur, which are also called W- and M-shaped tops.
Indeed, often the market does not increase, just a movement in the opposite direction occurs, as a rule, such a movement precedes the formation of a reversal pattern.
In addition to the classic reversal structures, some traders are modernizing the rules for identifying and trading according to existing patterns. One of the popular models called "Dragon".
The Dragon model is very similar to the Double Bottom model, but with some applications that make it clear that we have a completely different model, and not the classic price structure. As the author of the model himself, it is possible to trade on various timeframes, the low level of risk for profit makes such work more attractive for the trader.
In the article, how to distinguish the "Dragon" pattern from the classic "Double Bottom" pattern, we will consider in detail the trading rules, levels of profit taking and entering the market if the model does not justify itself.
Структура бычьей модели "Дракон"
I will immediately note that there is a pattern that formed at the bottom of the market and offers the trader a signal to buy, as well as a pattern at the top of the market, which will lead to an early fall in prices. As mentioned above, the model is similar to the W-bottom. Take into account its features:
The Dragon for a bear market is starting to form from a viewpoint called the Head. This is the first move from the initial high to the low of the pattern.
Как только цена снижена до минимума и отталкивается вверх, эта точка превращается в "Левую лапу" модели.
Then the price continues to fall, but the decline should not exceed the Fibonacci retracement of 38.2-50%. Here we expect the formation of the "Back" of the dragon.
The next upward movement from the "Back" may be slightly higher or lower than the "Left Paw" within 5-10%. We expect the formation of the "Right Paw" of the model. Here you can look for aggressive entry points, but for more conservative trading, you should still wait for confirmation.
Next, we expect the price to move down from the "Right Paw", the so-called "Tail" of the dragon. Here we determine where to fix the profit from sales according to the pattern.
Where to open a position on the "Dragon" model?
In his first works, the author suggested looking for signals to open positions on the "Right Paw" of the model, but later only a breakout of the trend line was considered a strong signal to enter the market.
However, a big advantage of opening a position at the time of the formation of the second paw of the model is a small risk in comparison with the potential profit. Therefore, aggressive traders can use this opportunity to open a position with a minimum Stop Loss.
The trend line should be drawn from the Dragon's "Head" point and through the model's "Back" point. As soon as the price closes above such a line, and there is, for example, a divergence on the MACD indicator, this will be the second signal to open a position according to the pattern.
The third signal to open is the breakdown of the "Back" of the model, which is located at the level from 38.2% to 50% of the correction from the "Head" to the "Left Paw". Here the trader focuses on the breakdown of the horizontal level. The signal is very similar to the classic Double Top and Double Bottom patterns.
If we consider the completion of the formation of the "Dragon" pattern in the bearish section of the chart, then the market entries can be divided into three components:
1. Opening a position at the time of the formation of the "Right Paw". The position will be aggressive as the pattern has not formed yet and there is no confirmation for a reversal. However, the low risk/reward ratio looks very interesting in this case.
2. We open the second position with a breakdown of the downward trend line, which we build through the extreme points of the "Head" and "Back" of the dragon. This deal is already more conservative. The pattern is almost complete and there is confirmation from market participants in the form of a breakdown of the downtrend line.
3. The third position is opened at the moment of the breakdown of the "Back" of the dragon. It is considered too cautious and has much higher risk to reward ratios.
How to define goals according to the "Dragon" model?
In the classic W and M-shaped tops, just the height of the model is taken to determine the targets. The Dragon uses Fibonacci levels to set profit targets. You can set Take Profit at three important correction levels:
1. Traders set the first target at a level between 61.8% and 78.6% of the correction from the "Head" of the pattern to the "Left Paw".
2. The second target is located at the level of 100% correction. As a rule, this point coincides with the level of the "Head".
3. The third target, the most optimistic, is located between the levels of 1.27% and 1.618% from the "Head" to the "Left paw" of the model.
Where to put Stop Loss?
Stop Loss when trading on the model is set below the low of one of its paws. If the "Left paw" is lower than the "Right paw", then Stop Loss is set below this level. If the "Right Paw" is lower than the "Left Paw", we focus on the second paw of the model and set the Stop Loss below it.
In simple terms, stop loss is placed below the low of the bullish model or above the high of the bearish model.
An example of opening a position according to the "Dragon" model
Let's consider an example of working out the model on the GBP/CHF currency pair. As you can see, the bearish pattern "Dragon" is being formed, there is already a "Left Paw" and "Back" of the dragon. We can look for a sell signal now, because the Right Paw of the pattern is forming, and this is an aggressive place for the first trade. Stop Loss is placed above the level of 1.2555, that is, above the high of the "Left Paw".
Further, we can assume that the breakdown of the ascending trend line will take place at the level of 1.2460 - this will be the second entry point into the market. The Spin will be broken at the level of 1.2410 - this will be the third sell position.
We fix the first profit at the moment of testing the levels 1.2390 - 1.2346. We fix the second one at the level of 1.2290. The third place for profit taking is located between the levels of 1.2222 and 1.2130.
