Candlestick patterns help traders interpret price behavior and identify potential reversal points or trend continuation. One of the rare but interesting patterns is the 'Dragon' pattern. The appearance of this pattern on the chart often signals a possible change in price direction, which can become a useful tool for making trading decisions. Let's take a look at what the 'Dragon' looks like, what it means, and how it can be used in crypto trading.
What is the candlestick model 'Dragon'?
The 'Dragon' pattern structurally resembles the well-known 'double bottom' model, but has its own characteristics. It consists of two bottom points (the bottom and the second bottom) connected by an ascending neckline. The 'Dragon' is believed to symbolize the end of a downward trend and a transition into a growth phase.
Signs of the candlestick model 'Dragon':
First bottom point: a first minimum price is formed on the downward trend (the first point of the 'dragon's belly').
Rise and neckline: after the first point, the price begins to rise, forming a line called the 'neckline'.
Second bottom point: the price declines again and forms a second bottom, close in level to the first.
Ascending reversal: after the second bottom, the price rises again, breaking the neckline, which often indicates a trend change and further growth.
Application of the 'Dragon' in crypto trading
For cryptocurrency markets, where high volatility and frequent reversals are observed, the 'Dragon' can become an important indicator of a potential start of a bullish movement after a prolonged decline. However, to use it effectively, it is necessary to consider additional signals and indicators.
Trading strategy based on the 'Dragon' model
Searching for patterns at key support levels: for starters, the trader should identify the pattern at significant levels where the price often halted in the past.
Signal confirmation: after the formation of the second bottom, it is recommended to wait for a breakout of the neckline. This increases the likelihood that the market will indeed reverse.
Entry and exit points:
Entry point: usually chosen at the breakout level of the neckline.
Stop-loss level: set slightly below the second bottom to minimize losses in case of a false signal.
Take-profit level: can be set based on key resistance levels or the distance between the neckline and the bottom points.
Example: how the 'Dragon' manifested in the crypto market
Suppose that on the Bitcoin chart, after a prolonged decline, a 'Dragon' pattern forms. The first bottom was observed at the level of $60,000, then the price rises to $65,000 (neckline) and returns again to the level of $60,500, forming the second bottom. After that, the price breaks the level of $65,000, and an upward movement begins. Traders who focused on this pattern could open a long position at the breakout level with targets at $70,000 and above.
Risks and limitations of the 'Dragon' model
False signals: like many patterns, the 'Dragon' can give false signals. Therefore, it is important to use additional indicators, such as trading volumes or oscillators.
Volatility of the crypto market: in cryptocurrency trading, prices can change sharply, which sometimes leads to the rapid formation of false patterns that may appear more stable in other markets.
Psychological factor: traders sometimes tend to see the 'Dragon' where it is not, which can lead to erroneous decisions. It is better not to rush into opening positions until sufficient confirmation is obtained.