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ASIA PACIFIC’S PREEMINENT TRADING MAGAZINE
S G $ 9 . 8 0 / A $ 9 . 9 5 / H K $ 6 8 / R M $ 1 9 . 8 0
MICA(P) 229/05/2007
ISSN 1793-2149
VOLUME 3 ISSUE 11
www.tradersjournal.com
TM
Retail Tradingwith Market MakerConsciousness
TRADING TOOLS:
Spread & Pairs TradingEquity Curve analysis3-Drive PatternThe Dragon PatternInside Bar with the MACDKagi ChartsMomentum Reversals
Balancing the Demands of Lifeand TradingHow to Avoid Tripping Yourself UpThe Psychology of HandlingMarket Losses
TECHNICAL ANALYSIS
Dragons
in the Markets
Pattern recognition is an excellent way to identifyrecurring price behaviors. Suri Duddella provides alook at the ‘Dragon’ pattern with rules to trade it
SURI
DUDDELLA
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NOVEMBER 2007 / VOL. 3 ISSUE 11
Fig. 1A and Fig. 1B shows Dragon Examples
‘P
attern Recognition’ in echnical Analysis is dened as a process where we recognize recurringevents identiying certain predictive pat-terns o price behavior. Tese patterns areclear derivatives o human behavior mani-ested in the markets. Although patternsvery rarely repeat exactly at the same trad-ing levels or the same dimensions, thereexist patterns that repeat with similarshapes and similar sequences. Identiyingthese patterns and trading them with a seto rules adds to a trader’s success. Suc-cessul pattern recognition and executionmust consist o a ramework and a rulebased trading methodology. In this arti-cle, I would like to describe one o my a-vorite patterns in trading called ‘Dragon’ with a pattern recognition ramework andits trading rules.Te echnical Analysis arena providesplenty o patterns, cycles and indicatorsor a trader’s arsenal. A powerul basicpattern is the ‘Double op’ or ‘DoubleBottom’ pattern. Most traders are amil-iar with the concepts o ‘Double ops’and ‘Double Bottoms’ or ‘M-ops’ and‘W-Bottoms.’ However, all o these pat-terns have variations and diferent char-acteristics.Markets rarely transition rom bearishmode to bullish mode (except in V-opsand V-Bottoms) without going througha series o price action sequences to testsupport and resistance areas. Major mar-ket bottoms or market tops involve aseries o turning points (Swing Highs inM-ops or Swing Lows in W-Bottoms)ollowed by some congestion beore pick-ing a countertrend direction rom priormoves. Te Dragon pattern highlightsthese turning points (Swing Lows/Highs)and provides a rule-based methodology or trading them. Dragon patterns arevisible in all-time rames and in all marketinstruments.
Dragon Framework
Te Dragon pattern is similar to the ‘W’pattern or the ‘Double Bottom’ pattern with a ew diferent trading rules and tar-gets. Inverse Dragon patterns are similarto ‘M’ pattern. Dragon patterns usually orm at market bottoms. Dragon patterns work in all timerames and in all marketinstruments. Like most ‘Double Bottom’patterns, Dragon patterns present excel-lent trading opportunities with low risk to reward ratios.Te Dragon pattern starts with a ‘Head’ormation and price declines rom thehead level to orm two legs o the Dragon.Tese two legs usually orm within 5% to10% o the price diference. Te secondleg has a strong indication o reversal as itposts a key reversal bar or a divergence inany oscillator indicators. A spike in vol-ume usually ollows the price rise o thesecond leg. A trend line is drawn con-necting the head o the Dragon to thehump. When price closes above the trend lineand is conrmed by price action or di-vergence in any oscillator, it signals a re-versal. Te second conrmation o theDragon pattern occurs when the pricecloses above the hump, which is 38% to50% o the range or the Swing High/Low between the two Dragon legs (or peaksor Inverse Dragon) rom head to the low o the rst leg.
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NOVEMBER 2007 / VOL. 3 ISSUE 11
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