Here, in this article, we explain how the Cypher harmonic pattern works, identify it, and trade it. For the most part of the harmonic patterns, it’s best to lock in profits as soon as possible. Since the cypher pattern is one of the most profitable harmonic patterns, you can give it more room for the price action to breath. For instance, the examples above show bullish harmonic cypher patterns in which the AB legs have moved below the 61.8% Fibonacci retracement levels.

• The Cypher harmonic pattern is an exciting harmonic pattern to be used in tranquil markets; however, you should avoid relying on it in rapidly changing markets.
• You’re now armed with the knowledge to spot and trade the Cypher Harmonic Pattern like a pro.
• The XA line stretches as far as the prices decline, and the AB line traces the bounce back.
• Now, we’re going to review the Cypher pattern trading strategy rules.
• Swing B – C must extend beyond the high created by swing A – B, at least to the 1.27.2% level, but no further than the 1.41.4% level.

If you’re not a fan of reversal strategy, and you prefer a trend following strategy, follow the MACD trend following strategy-simple to learn another strategy. According to the custom, any harmonic pattern offering a success rate of less than 40% shouldn’t be used as the sole basis for your trading decisions. Cypher pattern trading strategy has a success rate of over 70% and has been a popular choice for new traders.

How do you trade Cypher patterns?

Similarly, point B indicates an upcoming rise, and you can use buy orders to generate profit from it. Now, retrace the line XA between 38.2% or 61.8% to mark point B; the candlestick shouldn’t be touching either limit and should mark the change of ongoing trend. Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion. The Protective Stop Loss should be below the X point on the trend. It is the best position that would prevent you from losing so much, should there be any break below that point.

The C point within the structure should be a minimum 127% of the XA leg, measured from point B. At the same time, the C point should not extend beyond the 141.4% level. The second leg within the cypher pattern must retrace within a specific Fibonacci range of the initial leg.

This level is marked on the price chart with the black dashed line below the entry point. After making a slightly lower price move following the entry point, the price began to rise quickly. And fortunately on this particular trade, we were in no real jeopardy of having our stoploss triggered. In this example, we can see a bearish Cypher forming as part of a larger downtrend. The Cypher is also more advanced than other patterns, like the Gartley, Bat, or Butterfly, so you may need to spend some extra time learning how to recognise and trade it effectively. Once you master the skill, however, you’ll find that the Cypher can be a valuable addition to your trading arsenal.

Bullish Cypher Trade Example

The main difference lies in the Fibonacci ratios and, more importantly, the location of point C. In the butterfly chart pattern, the C point is placed below or above the A point, for a bullish or bearish pattern respectively. On the other hand, the formation of the Cypher pattern is the opposite of the butterfly pattern. The cypher pattern is an advanced harmonic pattern that, when traded correctly, can have a truly outstanding strike-rate as well as a pretty good average reward-to-risk ratio. As with any other harmonic pattern, the Cypher chart pattern is a reversal pattern, and the theory behind it is that there is a strong correlation between Fibonacci ratios and price movements.

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Many recent entrants have attained significant profits by using the strategy. While it might not be the most exciting harmonic pattern, Cypher patterns simplify your trading decisions and help you gain excellent results. For the final leg, spot the reversal at point C and retrace XC to about 78.6% to mark point D.

Sometimes, the market may go upward, but as soon as it hits its peak, there will be a decline and vice versa. Harmonic patterns rely on geometrical formations and Fibonacci numbers to find turning points cypher patterns and price changes. Fibonacci numbers are key ratios highlighting multiple areas where security may stall or reverse. The stock market isn’t gambling, and everything works according to a system.

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Like other harmonic patterns, the thing with any harmonic Cypher pattern is that the Fibonacci ratios between the points have to match for the pattern to validate, or you do not take the trade. This is how it works with harmonic chart patterns – they have exact numbers and shapes that must occur for a trade to be made. After you grasp how to draw the Cypher pattern on a price chart, you need to find where and when to enter a valid Cypher pattern trade, set a stop loss, and take a profit target. Make no mistake, trading the Cypher chart pattern is not easy, especially compared to other basic classical chart patterns.

With numbers like that on your side, you would be foolish to not implement the cypher pattern into your own trading plan. Basically, B cannot touch the 78.6% retracement of X to C (see the image above). The bearish Cypher forex pattern has been outlined and shown within the light blue shaded area. Starting from point X, the price of the EURCAD begins to decline sharply.

The “B” Rule

Regular readers of this site already know about my free price action course. The cypher pattern is the first in a series of advanced harmonic price action patterns that I will be adding to the course. This pattern is very similar to the Butterfly in both it’s construction and where it typically will occur (near the end of trends). However, the Cypher Pattern is a rare pattern and not one that shows up with a high amount of frequency. I do not know enough about this pattern, nor have I had the opportunity to trade it enough to gauge it’s ‘power’ versus its peers.

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A conservative profit-taking approach would be to partially close the position at A, although C would have also been suitable in this scenario. Using the Fibonacci extension tool applied as described above showed us an optimal second target at 161.8%. Traders typically place orders at D to catch the potential reversal.

The X point highlights the peak in a bearish market and the lowest in a bull market. Cypher Patterns are the most exciting types of harmonic (XABCD) patterns. With it comes to the management of risk during trades, these patterns are helpful. If we should place this trading strategy on the Risk-Gain ratio and a 40% success rate, we could see that this strategy possesses a very great efficiency. Be careful not to misuse the patterns so as not to incur losses while trading. Always take your profit once you get to point A on the pattern.