The Bearish Dragon pattern, as seen on the EUR/USD H4 chart, is a type of reversal pattern. The main objective when trading this pattern is to capture the reversal movement from an uptrend to a new downtrend. Below are the recommended steps and the common trading approach for the Bearish Dragon:
Bearish Dragon Pattern Identification
Before entering any trade, it's essential to ensure the Bearish Dragon pattern is correctly identified:
- Point X: Marks the start of the pattern's formation, representing the low of the previous trend.
- Point A: The highest point, signaling the end of the upward movement.
- Point D: This is the critical reversal point, where the new downtrend is expected to begin.
Defining Fibonacci Levels
To help identify potential entry points, stop loss placements, and profit targets, Fibonacci levels are essential. They provide guidance on where the correction might occur and where the price might find support or resistance.
Fibonacci Retracement (X-A):
- 38.2% and 50%: These levels are important in determining the first correction of the trend. They can serve as potential profit targets or areas where the price might pause before continuing to fall.
- 61.8%: Considered the strongest support level during a reversal correction. A break below this level confirms the strength of the reversal.
Fibonacci Projection (A-D):
These levels help predict how far the price might go after the reversal:
- 61.8%, 100%, and 1.272%: These are potential profit target levels after the decline begins, with 1.272% being the final extension point, signaling a more aggressive fall target.
Recommended Trading Strategy for the Bearish Dragon
Sell Entry:
Point D is the most recommended area to initiate a sell position. This is because it represents the final point of a possible reversal from an uptrend to a new downtrend. Upon reaching point D:
Wait for a confirmation signal of reversal, such as a reversal candlestick pattern (e.g., a Doji or Bearish Engulfing pattern) or a break of a significant support level.
Once the price reaches point D (around 1.120–1.121), initiate a sell position.
Stop Loss:
To protect against unexpected counter moves, the stop loss should be strategically placed:
- Above Point D: A common approach is to place the stop loss slightly above point D, around 1.121 or slightly higher, depending on risk tolerance.
- Above Fibonacci Resistance: A conservative stop loss can be placed above 1.124, which is the 61.8% Fibonacci projection level, in case the price moves in the opposite direction.
Profit Targets:
Targets are determined by the support levels identified by Fibonacci and key support points on the chart.
- First Target (38.2% Fibonacci): The first target is around 1.104–1.106, the 38.2% Fibonacci retracement level. This is the first support point where traders can lock in partial profits.
- Second Target (50% Fibonacci): An intermediate target could be around 1.109, a significant support level.
- Third Target (61.8% Fibonacci): For those aiming to capture the full reversal movement, the final target can be around 1.094, which is the 61.8% retracement level.
Additional Confirmation (Signals and Indicators)
Besides the pattern itself and Fibonacci levels, it is common practice in trading to check for other confirmation signals, such as:
- Volume Indicators: An increase in volume during the reversal at point D can confirm that major market participants are entering the move.
- Oscillators like RSI or MACD: An overbought RSI or a bearish crossover on the MACD can provide additional confidence to enter the sell position.
- Reversal Candlestick Patterns: Keep an eye out for reversal candles like Doji, Pinbar, or a Bearish Engulfing near point D, which indicate a possible change in direction.
