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Introduction

The Cypher harmonic pattern is a reversal formation that occurs within a trending phase of the market and appears as a terminal move. This means that, when it is fully formed, there should be a reversal in the market within the harmonic class of patterns.

It is not restricted to a particular asset. It is seen across different financial markets forex, stocks, and cryptocurrency. Having said that, it is a less commonly seen structure compared to some other harmonic. 

The cypher pattern comprises five points which are point XABCD. When it forms on a chart, it can easily be seen. This is because it has a wave-like appearance which displays the rising peaks or the falling valleys at a time. Traders or investors can successfully trade cypher patterns just like other harmonic patterns. They only have to wait for a reversal change to occur at the end and then make use of pending orders to make gain from a potential breakout when it occurs.

Characteristics of the Cypher pattern

Some of the characteristics of Cypher pattern are as follow: 

  1. Cypher pattern is not common as harmonic patterns.
  2. It has the structure of the butterfly in its construction and where it occurs, it is usually close to the end of trends.
  3. Cypher pattern has a high positive expectancy
  4. Cypher has a specific set of rules and conditions that must be fulfilled to be a particular cypher pattern. 
  5. It has a wave-like structure, showing either rising peaks or falling valleys. So, it can be spotted easily on a chat.
  6. The cypher pattern has four different price legs, having some Fibonacci relationships that are particularly defined.

Steps for trading the Cypher pattern?

The cypher pattern is a modern harmonic pattern that when traded following the right process, can yield or produce the desired result or increase profit margin. As I said when mentioning some of the characteristics of the Cypher pattern, you will have to apply a set of simple rules to profitably trade it. Following these rules will help to reduce risk levels and help you maximize profit.

To successfully trade the Cypher pattern, follow these steps.

Step 1: Drawing/identifying the Cypher patterns

To do this, 

  • On your TradingView platform, go to the harmonic pattern indicator on the right-hand side toolbar and click on it.
  • Then, look for the point, X on the chart. This can be any swing low/ high point.
  • After locating your first swing high/low point, follow the existing market swing wave movements.
  •  Validate every singular swing leg and abide by the forex Fibonacci ratios of the cypher pattern.

Step 2: Trading the pattern

After knowing how to identify and qualify the harmonic cypher pattern, the next step to take is to trade the pattern. To do this, you have to follow the standard methods designed for trading the cypher pattern. These methods are:

Buy entry point

Comparing it to others, the Cypher harmonic pattern is known to have the widest rate of winning. It is the type of harmonic pattern with the best risk management potential. 

With that in mind, go on to buy using a market order at the first candle. Ensure you do this before the completion of the D point located at 0.786 Fibonacci retracements belonging to the XC leg. You do not have control over the market. So the moment the market touches the 0.786 level, wave D is in place. When the CD leg can reach the 78.6 percent retracement level, the cypher pattern is complete and becomes valid. 

Take profit

The next point is to take profit following the standard method for scaling out of your position at the first take profit level and end the trade at the second take profit level. Once you get to point A, go on to take profit. 

Note that the cypher patterns trading method is a reversal method. So, ensure you capture as much as possible from the new change or trend Ensure you take profits the moment you get to point A of the pattern. This is necessary because it has a conservative take profit target. 

Stop-loss

The lowest pips gap to give to your trade above X in the intraday charts is 10 pips. Also, note that when you are trading a cypher pattern, you should place your stop-loss at least 10 pips below the low of X. But if it is a bearish pattern, you should place the stop-loss at least 10 pips above the high of X. This is because, there is no other suitable place to keep your stop-loss, and any break below will render the trade to be invalid.

Taking a Short Position

The above steps are for taking a long position. When you are to take a short position within the bearish cypher trading pattern, simply follow these steps.

  • Enter a limit order selling at the 78.6% retracement level of the XC leg. Note that this is called the D point.
  • Then, go on to place a stop-loss order above the position of X
  • Here, we make use of a two-tiered take-profit target method. The first target will be set just above the A point swing low, and the second and final target will be placed just above of the C point swing low.

Conclusion

Remember, the Cypher harmonic pattern is an advanced type of harmonic pattern. It has the highest winning rate compared to the other harmonic patterns. So, it can be considered as the best harmonic pattern for managing risk. Also worthy of note is the fact that Cypher pattern is not common like the other harmonic patterns. So, it becomes very important that you always watch out for it and do not hesitate to advantage of it whenever it appears. Once it appears, trade it. You will reduce risk and maximize profit when you trade the cypher pattern following the set rules and steps that you have just read here.