What is the Cypher Pattern?
The cypher pattern is an advanced harmonic pattern that, when traded properly, can have an exceptionally high strike rate as well as an average reward-to-risk ratio that is generally quite favourable.
A five-point pattern made up of the letters XABCD makes up the cypher. Due to its distinctive wave-like appearance, which shows either rising peaks or sinking valleys, it is simple to identify on a chart. By waiting for a reversal at the end and then using pending orders to profit from any potential breakout, traders can trade it similarly to other harmonic patterns.
This pattern resembles a butterfly in both its design and the location where it will appear (close to the end of trends). The cypher pattern, however, is unusual and does not appear regularly. However, do not equate rarity with being more powerful or profitable.
How to identify the Cypher pattern?
To be confirmed, the pattern must satisfy the following conditions:
- B must retrace to a wide range of 38.2 to 61. percent of XA, at least 38.percent but not more than 61.percent.
- C is an extension leg that extends beyond A – but it must go to at least 12percent, however, it is usual for it to travel as far as 113 to 14 percent. If it exceeds 14 percent, it is deemed illegitimate.
- The CD leg should exceed the XC level of percent.
- D’s PRZ (possible reversal zone) is a broad area where the price must arrive. Price can fluctuate between 38.2 and 61.8 per cent.
Cypher has fewer rules to follow than other harmonic patterns. Although its success rate is not as high as that of Gartley or Bat, the frequency with which it appears and the simplicity of the rules make this pattern a favourite among all beginning traders. When the market is calm, this pattern works well. The cypher pattern becomes less dependable in a strong trending market, especially after the news. The larger the pattern (and the longer it takes to build), the stronger the support/resistance it provides.
Cypher pattern rules
There are also a few cypher pattern rules to follow to extract just flawless patterns from the chart. XABCD represents the pattern’s five waves.
- The XA wave is a straightforward impulsive wave.
- The AB wave will retrace to the Fibonacci level of 61.8. It’s not a precise figure. It could be anywhere between 50 and 78 Fibonacci levels.
- The BC wave impulsive wave, and it must intersect with the inverse Fibonacci of ratio 1.272 of the AB wave.
- The CD wave will also retrace, but it must break through the B point. The cypher pattern is now complete after breaking point B.
Now the price will reverse, and the final wave will reach point C, which is the take profit level.
What Does the Cypher Pattern Tell Traders?
The ‘B’ Rule
Even though it is not widely followed, it is an important rule. The rule states that B cannot come within 78.6 per cent of the retracement of X to C, including the candlestick wicks.
Bearish Cypher Pattern
The XA wave will be a bearish impulsive move. The highest point will be X, while the lowest point will be A. Following some pullback, the BC wave will also be a bearish wave, with the C point being the lowest. These are the basic requirements. The pattern may be seen clearly in the photograph below.
Bullish Cypher Pattern
The XA wave in the bullish cypher pattern will be a bullish impulsive wave. The lowest point in this pattern is X, while the highest point is C. The price will break low after two higher highs, suggesting a trend reversal, but the price is trapping retail traders. Take a look at the image below.
Market Psychology
The cypher is a technical wave pattern that occurs when the market is trending but then reverses sharply during the day. The crucial aspect of the bullish cypher is that both the lows and highs are rising. The bearish pattern has the opposite effect.
If the cypher is completed with a reversal at point D, it may eventually become a trend channel where the price travels between highs and lows. Cyphers can also appear within pre-existing price channels.
How to Trade When you See the Cypher Pattern?
You will follow a series of simple principles when trading the cypher pattern. They will aim to minimise risk while increasing revenues. Despite the fact that there is one more step to learn before developing the cypher pattern trading strategy guidelines.
Step 1: Drawing Cypher patterns
- Select the harmonic pattern indicator from the TradingView platform’s right-hand side toolbar.
- Determine the chart’s starting point, X, which can be any swing low or high point.
- Follow the market swing wave movements once you’ve discovered your first swing high/low point.
- Each swing leg must be confirmed and must adhere to the cypher pattern forex Fibonacci ratios.
Step 2: Trading process
it’s time to trade the harmonic cypher pattern now that you know how to recognise and qualify it. The cypher pattern is commonly traded using the following methods:
Entry point
Because it has the highest winning rate, the cypher pattern may be the most intriguing harmonic pattern for risk management. Backtesting findings have consistently demonstrated that the cypher pattern forex is a very reliable harmonic pattern.
Following that, place a market order on the first candle preceding the completion of the D point at the 0.786 Fibonacci retracement of the XC leg. Wave D begins when the market reaches the 0.786 level because you can’t predict how far the market will go.
The cypher pattern is full and legitimate when the CD leg reaches 78.6 percent retracement. However, the traditional entry point for a successful cypher pattern trade is the 78.6 percent Fibonacci retracement level of X to C.
Take profit
There are other strategies to benefit from this pattern, but the most common is to scale out of your position at the first take profit level and exit the trade at the second take profit level. Once you reach point A, take a profit. Draw a Fibonacci retracement of the CD leg to get to these levels.
The cypher patterns trading strategy is a reversal strategy. Make sure you capitalise on the new trend as much as possible. If you don’t like reversal strategies and like trend-following strategies, try the MACD trend-following strategy-simple to learn another one. The method has piqued the curiosity of the Forex trading community.
Because the pattern has a conservative take-profit target, make sure you take profits after you reach point A.
So, why should you benefit so soon?
For the most part, it’s ideal to lock in gains as quickly as feasible with harmonic patterns. Because the cypher pattern is one of the most profitable harmonic patterns, you can give it extra breathing room. There is a probability that waves A will be retested.
Stop-loss
Make sure your trade is at least 10 pips above X in the intraday charts. When trading a bullish cypher pattern, set the stop-loss at least 10 pips lower than the low of X. For a bearish pattern, set the stop-loss at least 10 pips higher than the peak of X. Because any break below will automatically invalidate the transaction, that’s the only sensible spot to hide your stop-loss.
