Would you like to learn cypher pattern trading strategy that can produce up to an 80% strike-rate? In this article, I’m going to show you (in detail) how to trade the profitable harmonic cypher pattern trading strategy.
May 19 2020 | AtoZ Markets – There is a lot of information going around on how to trade this lucrative pattern. Not all of it is correct. I’m going to show you how to trade the cypher pattern the right way. I’m also going to show you a couple of tricks (you may call trade hacks) that I have learned to help you qualify the best cypher patterns to trade.
Harmonic cypher pattern trading works in every market, however, the examples in this article will be geared toward the Forex market.
What Is a Cypher Pattern?
We will call identifying Cypher Pattern stage as our Step 1. The cypher pattern is an advanced harmonic price action pattern you can find in all kinds of markets. When traded correctly, it can achieve a truly outstanding strike-rate as well as a pretty good average risk-reward ratio. Cypher patterns can be either bearish or bullish. Let’s start with the rules for identifying a Cypher Pattern, in case you’re completely unfamiliar with cypher pattern trading.
Cypher Pattern rules and targets
A cypher pattern is made up of five points, typically X, A, B, C and D labels. The lines between each of these points are called legs. These legs are referred to as XA, AB, BC and CD respectively. The XA leg begins the pattern.
Below are the rules for identifying a cypher pattern:
- The B point stands at the end of the AB leg, which is a retracement of the XA leg. The B point must lie between a 0.382 and 0.618 retracement of the XA leg;
- The C point lies at the end of the BC leg and should be a 1.272 to 1.414 projection of the XA leg;
Point D should be a precise 0.786 retracement of the line between X and C (XC). The D point is the end of the pattern.
Cypher Pattern trading strategy steps
- Step 1: Identify Cypher Pattern on your chart
- Step 2: Identify the entry position based on bullish or bearish signal
- Step 3: Identify the stop loss (below wave X on bullish, above wave X on bearish signals)
- Step 4: Identify take profit levels according to the following guidelines
Your first take-profit is at the 0.382 retracement of the CD line and the second take-profit is at 0.618 of the CD line. For risk management, you could close half of the position at the first take-profit and close the rest of the position at the second take-profit. The entry point is at point D, at the 0.786 retracement of the XC line.
You should place the stop-loss below the X point at 10 or more pips below for intraday traders. It is a good idea to adjust your stop losses after your position goes into profit. You could, for example, move the stop loss to the entry point when the first take-profit is hit. This will prevent a market reversal back across the D point from wiping out your previous gains.
The only real caveat to the rules above is that neither the B point nor even the wicks of the candle that produces the B point should ever touch the 0.786 retracement level of XC. If this occurs, the price retracement is too deep and this is not a good cypher pattern.
Since the risk of the trade is the distance between the entry point and the stop loss, and the reward is the area between the entry point and the take-profit—you may encounter a cypher pattern with a poor risk-to-reward ratio. You can improve this ratio by waiting for the CD leg to retrace below the 0.786 level of the XC line and enter the trade there.
Bearish and Bullish Cypher Patterns Rules
The bullish cypher pattern resembles the letter M. A bearish cypher pattern is just an upside-down bullish cypher pattern and looks like a W or an upside-down M. The proportions are the same in either case. The entry levels, stop loss levels and take-profit levels are all the same.
The orientation will be different depending on whether the pattern is bullish or bearish. Nevertheless, you can perform trade in the same way.
Cypher Pattern strategy success rate
Like every other trading strategy, cypher pattern strategy will never give you 100% results. In my experience, depending on the instrument you trade you can expect as much as 80% success using this harmonic wave. However, most successful traders will have a 40-55% success rate using this strategy.
If we consider the Risk-Reward ratio and a 40% success rate this tool has very good potential.
I spoke with Yagub Rahimov, one of the most ani-harmonic pattern commentators I know on Cypher pattern, here is what he said:
“Harmonic patterns will not work for most traders unless they understand the real price action making these theories into tools. Every trader needs to develop a sense to identify a shifting trend. In my own experience, the Cypher Pattern has a flaw in wave B, which I believe tends to give much better results if we place it between 0 – 38.2 retracement level.”
The trading strategy based on the Cypher pattern is a part of the graphical analysis, using Fibonacci retracement levels. The pattern should continue the previous trend, while point D is a reversal point, highlighting the end of the counter-trend retracement.
Ratios between legs of the formation have to be in certain ranges, meeting the conditions of the pattern. You can use this trading method as a standalone algorithm or in conjunction with additional technical indicators measuring the momentum and showing the trend’s direction. 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.