A “bearish dragon pattern” in technical analysis refers to a candlestick pattern that indicates a potential reversal of an uptrend, signifying that sellers are gaining dominance and a downward price movement is likely to follow, often resembling an “M” shape on the chart; essentially, it signals the end of a bullish trend and the start of a bearish one.
Components of a dragon pattern
There are four important components of a dragon.
- Head
- Feet
- Hump
- Tail
1. Head
The head of the dragon is the begging of the dragon pattern. It indicates the prior trend. In the case of a bullish dragon, the prior trend is bearish. On the other hand, a bearish dragon forms above a prior bullish trend.
2. Feet
There are two feet of the dragon. The positioning of the feet is so the second foot is a little below the first foot. If the second foot is bigger in size, the reversal is usually greater.
In the case of a bearish dragon, feet are formed in the inverted position as the dragon’s body is reversed.
3. Hump
It is a slight rise in the prices compared to the feet of the dragon. It is located between two feet but at a higher level in the case of a bullish dragon. In the case of a bearish dragon, the hump is below the feet.
4. Tail
In the case of a bearish dragon, a bearish breakout takes place after the tail of the dragon. In this case, the number of sellers dominates a market and prices begin to face a fall.
It is the last point of the Dragon’s body. It is the point where a breakout in the market takes place. In the case of a bullish dragon, the price begins to rise after the formation of a tail. The market begins to take new highs, and the bullish sentiment takes place. It is the time when the number of buyers begins to take over the market.
Trading strategy for a bearish setup
Bearish dragon is a rare phenomenon. If you encounter a bearish dragon, follow the following trading strategy.
Entry
Once this dragon appears on the chart, the best time to enter a trade is below the second foot. Draw a trend line from the head of the dragon which crosses the hump. The point where the trend line crosses the area near the second foot is a significant point for entry into a trade.
Take profit
In a short trade, you can take profit by drawing a parallel line to the head of the dragon. On the other hand, if you take a long position, wait for the bearish market breakout to take a profit.
Risk management
To minimize your losses, place the stop just above the first foot. It will help you to protect your account in case the price doesn’t obey the dragon rule.