Trading Dragon Pattern in S&P Emini (@ES)

April 6, 2012 · Posted in Double Bottom, Dragon · Comments Off on Trading Dragon Pattern in S&P Emini (@ES) 

Dragon Patterns are similar to Double Bottom patterns. But Dragon Patterns have very specific rules and are usually low-risk setups.

This morning I noticed a Dragon pattern since I came to office. I resisted trading it until the market open. Being a holiday and weekend I was expecting to trade light or NOT trade at all but at the Open I have decided to trade Dragon with some caution. ES Dragon on 1220 Tick chart was very compelling and it is such a rare opportunity. At 9.31am I placed a trade as ES started to trade above the Hump level (1389). The reward could be as high as 1400-1402 targets with a stop between the lowest of the two legs in two steps of half each. Targets are 1392, 1396, 1398-1400. I also planned on trading exiting the trade if it does not work out by lunch time.

Around 9.50am, my first target was hit at 1392.5 giving me +3.5 points on 1/3rd of my trade position. Then I moved my stop to 1389 (b/e). About 11.05am, my second target was reached at 1396 adding +7 points on the 2/3rd of the trade. My next target is 1398-99 with stop moved to 1393-94. ES did reach 1397 and I kept waiting. After agonizing 1 hour 45 minutes at 12.45pm, ES hit my stop loss at 1393.5, adding 4.5 points to final lot.

I am glad I closed my trade as ES started to drift side-ways rest of the day and closed around 1392.

Dragon patterns usually form at market bottoms. Dragon patterns work in all time-frames and in all market instruments. Like most Double bottom patterns, Dragon patterns present excellent trading opportunities with low risk to reward ratios. The Dragon pattern is similar to the “W” pattern and the Inverse Dragon pattern is similar to the “M” pattern, albeit with different trading rules.

The Dragon pattern starts with a “Head” formation and price declines from the head level to form two legs of the Dragon. These two legs in a Dragon pattern usually form within 5% to 10% of the price difference. The second leg gives a strong indication of imminent reversal when it posts a key reversal bar or a divergence in any oscillator indicators. The price rise in the second leg is usually followed by a spike in the volume. A trend line is drawn connecting the head of the Dragon to the hump. When the price closes above the trend line and is also confirmed by price action or divergence in any oscillator, it signals a reversal. The second confirmation of a Dragon pattern occurs when the price closes above the hump, 38% to 50% of the range from the head to the low of the first leg.

Trade: Aggressive traders enter a long trade when the price closes above the trend line (see Figure 8). A better trade entry may be when the price closes above the hump level. Enter a long trade a few ticks above the hump level.

Target: Targets are usually at 127% of the second leg range and another target is set near the Head level.

Stop: Place a stop order below the lowest low of the two legs.