The Cypher Pattern Trading Strategy will teach you how to correctly trade and draw the cypher pattern. More, you can use the cypher harmonic pattern on its own and have a profitable Forex trading strategy. It’s no mystery that geometric patterns can be found in the Forex price chart and the cypher pattern is a very good representation of that. The Cypher pattern forex is part of the Harmonic trading patterns and is the most exciting harmonic pattern as it has the highest winning rate.
Our team at Trading Strategy Guides is building up a step-by-step guide about Harmonic trading patterns and we recommend starting reading the introduction into the harmonic patterns here: Harmonic Pattern Trading Strategy- Easy Step By Step Guide.
It’s vital and indispensable to read the introductory article into the harmonic patterns as this will give you a better understanding of this.
The Cypher pattern forex works in every market and on any time frame, but we at Trading Strategy Guides recommend avoiding the lower time frames and only stick to the higher time frames, preferably the 4h and the daily chart. We want to make sure our readers are satisfied so if your main thing is trading in the lower time frame don’t miss the chance to read the Best Stochastic Trading Strategy- Easy 6 Step Strategy which lately has drawn a lot of attention from our readers.
We want to let you know that we’re going to continue in our efforts to provide you with all the necessary tools and information you need to successfully trade the Harmonic patterns. In this regard, we’re going to have a series of strategies soon that trades other Harmonic patterns like:
- ABC Bullish/Bearish
- AB=CD Bullish/Bearish
- 3-Drives Bullish/Bearish
- Gartley Bullish/Bearish
- Butterfly Bullish/Bearish
- Bat Bullish/Bearish
- Crab Bullish/Bearish
- Shark Bullish/Bearish
Before we get started, let’s look at what indicators we need to successfully trade the Cypher Pattern Trading Strategy:
In order to better identify the cypher pattern forex and to be able to draw cypher patterns, you’ll have to use the Harmonic Pattern Indicator (see Figure below). You can detect the Harmonic Pattern Indicator on most popular Forex trading platforms (TradingView and MT4) in the indicator section.
Don’t forget that you actually need to draw the Cypher pattern forex by yourself and check it matches the Fibonacci rules. We’re going to discuss this in more details in the next few paragraphs.
Now, let’s move forward and define the Cypher pattern forex.
What is the Cypher Pattern Forex?
In the harmonic pattern world, the Cypher pattern forex is a four leg reversal pattern that follows specific Fibonacci ratios. The Cypher pattern forex appears less frequent than other harmonic patterns because it’s hard for the market price to satisfy such rigid Fibonacci ratios. The Cypher pattern forex needs to satisfy the following Fibonacci rules:
- AB= 0.382 to 0.618 retracement of the XA swing leg;
- BC= extend to minimum 1.272 and maximum 1.414 of the XA swing leg;
- CD= retrace to 0.786 of the XC swing leg;
Defining the Strategy
The first rule of the Cyper pattern Forex is the retracement from X up to A has to come down and touch the 0.382 Fibonacci ratios but can’t close below the 0.618 Fibonacci ratios. Between the 0.382 and 0.618 Fibonacci retracements of XA swing-leg, we have our third point of the Cypher pattern forex labeled “B”.
The next rule of the Cypher pattern forex is a Fibonacci extension of the XA leg that comes in 1.27 but it doesn’t exceed the 1.414 Fibonacci ratios, this point of the move is labeled “C” and completes the BC swing-leg of the Cypher pattern forex. The final leg of the Cypher pattern where our orders will be executed, which is at the finishing point D. The point D is located at the 0.786 Fibonacci retracements of the entire move started from X up to C.
Cypher Pattern Trading Strategy
Going forward, you’ll learn how to trade the Cypher Pattern with a very simple set of rules that will try to minimize risk and maximize profits. There is one more important thing that we need to learn before to actually define the Cypher pattern trading strategy rules, which is to give you indications on how to apply the Harmonic pattern indicator.
Step #1 How to draw cypher patterns
I would walk you through this process step by step. All you need to do is to follow this simple guide and see figure below for a better understanding of the process:
- First, click on the harmonic pattern indicator which can be located on the right-hand side toolbar of the TradingView platform. In the MT4 terminal you can locate the harmonic pattern indicator in the Indicators library.
- Identify on the chart the starting point X, which can be any swing high or low point on the chart.
- Once you’ve located your first swing high/low point you simply have to follow the market swing wave movements.
- You need to have 4 points or 4 swings high/low points that bind together and form the Forex harmonic patterns. Every swing leg must be validated and abide by the cypher pattern forex Fibonacci ratios presented above.
Now, we’re going to lay down the Cypher pattern trading strategy rules.
Step #2 Buy Entry: Buy once CD-swing leg reaches 0.786 retracement of the XC swing leg.
From a risk management point of view, it may be the case that the Cypher pattern is the most exciting harmonic pattern as it has the highest winning rate. Our backtesting results have proven over and over again that the cypher pattern forex is a very reliable harmonic pattern.
Buy with a market order at the opening candle preceding the completion of the D point at 0.786 Fibonacci retracement of the XC leg. Once the market touches the 0.786 level we assume that wave D is in place, because we can’t control how far the market it will go. We’re only concerned for the Fibonacci ratios to me satisfied.
We can note that the price only had a small deviation below the 0.786 Fibonacci ratio – our entry point.
The next important thing we need to establish is where to place our protective stop loss.
Step #3 – Stop Loss: Place the Protective Stop Loss below wave X.
For the Bullish Cypher pattern Forex, you normally want to place your protective stop loss below the point X. That’s the logical place to hide your stop loss because any break below will automatically invalidate the trade.
The next logical thing we need to establish for the Cypher patterns trading strategy is the logical place for our take profit level.
Step #4 Bullish Cypher Pattern Forex – Take Profit: Take profit once we reach the point A
The Cypher patterns trading strategy is a reversal strategy and we want to make sure we capture as much as possible from the new trend. If you’re not a fan of reversal strategy and you prefer instead a trend following strategy, we encourage you to follow the MACD Trend Following Strategy- Simple to learn Trading Strategy a strategy that has attracted a lot of interest from the Forex trading community.
The Cypher pattern has a conservative take profit target. We want to take profits once we reach the point A of the pattern.
Why, do we take profit so early?
As with the majority of the harmonic patterns, it’s best to lock in profits as soon as possible and since the Cypher pattern is one of the most profitable harmonic patterns we can give it more room for the price action to breath and have the chance to at least see a retest of the wave A.
Note** The above was an example of a BUY trade using the Bullish Cypher patterns trading strategy. Use the same rules for a SELL trade. In the figure below you can see an actual SELL trade example.
Take a look:
The rules of the Cypher pattern trading strategy are pretty much straight forward, however, even though it has a bigger winning ratio than the other harmonic patterns, the Harmonic Cypher structure can be spotted very rarely on the chart so we need to take full advantage of the instances it shows up.
We hope the Cypher patterns trading strategy rules have been clear and succinct. If you still have questions, please leave them in the comment section down below.
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