There is a lot of information going around on how to trade this lucrative pattern. Not all of it is correct. 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. The cypher pattern is an advanced harmonic price action pattern that, when traded correctly, can achieve a truly outstanding strike-rate. A qualified cypher pattern consists of an impulse leg XA , followed by a retracement leg AB that reaches at least the That is followed by a continuation leg BC that must at least reach the Next, a Fibonacci retracement of X to C is drawn.
The qualified cypher pattern is complete when the CD leg reaches When I mentioned that the AB leg must not exceed a retracement of In the first example left , the wick pierced below the The second example right not only pierced below the Remember to apply the same concept to the The rule is simple.
Basically, B cannot touch the That includes the candlestick wicks. The following are standard methods of trading the cypher pattern.
When the CD leg reaches the There are a couple of ways to take your profits with the cypher pattern, but the standard technique is to scale out of your position at the first take profit level and close your trade at the second take profit level. To get your take profit levels, you draw a Fibonacci retracement of the CD leg see the image above. Your first take profit level is the The second take profit level is When price reaches the Alternately, you could close your entire position at the Place your stop loss at least 10 pips above the high of X in the case of a bearish cypher pattern.
According to the standard cypher pattern trading method , you should adjust your stop loss to your entry point once the first take profit TP 1 is hit. Do you use MetaTrader 4? If so, you can use this break even EA to automatically adjust your stop loss when price reaches TP 1. You may still be able to get into the trade.
The example above is a bullish cypher pattern. In this case, the pattern remains valid until price either breaks above the standard entry point far enough to trigger your adjusted stop loss or price breaks below X.
If price breaks above the entry point, but does not trigger your adjusted stop loss, and comes back down to your entry level or lower, you can still enter that trade. Harmonic cypher pattern trading can be very profitable. In fact, many traders claim to make consistent monthly returns using nothing but the cypher pattern.
With numbers like that on your side, you would be foolish to not implement the cypher pattern into your own trading plan. One disadvantage of the cypher pattern is that it has a tendency to provide trading setups in which the reward to risk ratio leans more toward risk than reward at least at the first take profit level. To make things worse, if the CD leg continues to retrace after you entered the trade as it often does , you must continue to adjust your Fibonacci retracement of the CD leg.
You should be able to judge whether or not the reward to risk ratio is good enough with a glance. If you find a cypher pattern with a poor reward to risk ratio, you may still be able to take that trade if you can get an improvement on your entry point see the image below. As I mentioned earlier, often the CD leg continues to retrace past the When it does, you can use that to your advantage by entering the trade with a better initial reward to risk ratio.
The cypher pattern remains valid until price retraces past X or reaches the first take profit level TP 1 , which would trigger your adjusted stop loss if you were already in the trade. The harmonic cypher pattern has become a very popular advanced price action pattern, mostly due to the outstanding strike-rate that you can achieve if you use it correctly.
The movements that create real cypher patterns may be more choppy at times, but as long as the movements are within the proper Fibonacci retracements and extensions, the patterns are valid. Traders that specialize in the cypher pattern trade it on time frames as low as the 5M. Be sure to backtest and demo trade the cypher pattern using the exact techniques and time frames that you plan to use in your live trading.
Was this harmonic cypher pattern trading guide helpful to you? I hope the instructions in this article have been clear and concise. If you have any questions or comments, please leave them below. Are you still looking for a profitable trading system? I recently changed my main trading system after testing a new one for over a year.
Hi Chris, Excellent article and looking forward to learning more about the other patterns. Thanks for the comments, Angela. You are correct about the retracements and extensions.
They just need to fall somewhere within those ranges without exceeding them with a close before reversing. As far as regular divergence off A and C goes, others have asked that question before. I prefer to trade regular divergence when a trend is likely exhausted increasing the chances of a reversal.
The XA leg or impulse leg will be an obvious move. It can come after a period of consolidation or a retracement as a continuation move or it can be a reversal of the previous trend. Of course, when you find this pattern, you will not even begin to consider it to be a possible valid cypher pattern until the CD leg is forming.
Or at the very least, you may start watching to see if the BC leg will reverse withing the valid range. Thanks for the kind words! I will be covering other harmonic patterns as well as other long-term price action patterns in the near future.
However, one of my Facebook followers suggested Formation Seeker to me. He said he had tried many and liked that one the most. Let us know how it goes if you try it out. Notify me of followup comments via e-mail. You can also subscribe without commenting.
Thanks Chris and very through on your explanation. Chris March 30, Thanks for the kind words, Robby. Angela Osmond March 30, When does X start? In other words, the XA leg will have already formed. It should be pretty obvious at that point. Olasunkanmi Dele April 24, Good job from you mate. Chris April 24, Ntobeko June 5, Chris June 5, Chris September 23, Add Comment Cancel reply Notify me of followup comments via e-mail.More...