Williams’ Strategy
Bill Williams is the creator of some of the most popular market indicators: Awesome Oscillator, Fractals, Alligator, and Gator.
How do you trade a Cypher pattern?
2022-05-12 • Updated
Information is not investment advice
The Cypher pattern isn’t the most famous trading formation. Nevertheless, this trading instrument can help you better understand and forecast the price moves. Learn how it works and add it to your trading toolkit.
Cypher Harmonic Pattern
The Cypher pattern is a reversal formation within the harmonic class of patterns. It occurs across various financial markets including Forex, futures, stocks, and crypto. The cypher pattern consists of four separate price segments, with defined Fibonacci relationships.
In an uptrend, the Cypher pattern makes higher highs and higher lows. Vice versa, in a downtrend, the Cypher pattern makes lower lows and lower highs.
Another attractive characteristic of the Cypher pattern is that the first three legs within the formation resemble a zigzag or lightning bolt.
Below you can see an example of the bullish Cypher pattern.
You can notice that the pattern is a five-point XABCD structure, which consists of four individual segments. In bullish formation, the A point and the C point make higher highs, and the B point makes a higher low.
Cypher Pattern Rules
There are some rules for classifying a valid Cypher pattern. The XA segment should always be impulsive. The AB segment, a corrective movement, retraces a portion of the XA segment. The BC segment continues the movement of the first (XA) segment and forms a higher high. Finally, the CD segment retraces a large portion of the entire movement between points X and C.
Traders use two primary Fibonacci tools to define the Cypher pattern. The first is the Fibonacci retracement, and the second is the Fibonacci projection.
The AB segment must retrace the XA segment by at least 38.2%, and it should not exceed 61.8%.
The C point within the structure should be a minimum 127% projection of the XA segment, measured from point B. At the same time, the C point should not extend beyond the 141.4% level.
Point D should terminate at or near the 78.6% Fibonacci retracement level of the price move as measured from the start at point X to point C.
The first and last are the most important rules for the Cypher pattern.
If the shadow of the candlestick appears inordinately large, then it will be better to use the candle close for measuring. On the other hand, if the shadow is of standard size, it’s better to use it in the measuring process.
Cypher Trading Strategy
We can prepare for a potential trade near the Cypher’s completion point when we find the trading pattern with the proper Fibonacci relationships.
A trader should follow the following trading strategy to open a long position upon detecting a bullish Cypher trading pattern:
- Enter a limit order to buy at the 78.6% retracement level of the XC segment, also known as the D point.
- Place a Stop Loss order below the X point.
It’s better to use a two-tiered Take Profit target strategy. A trader should set the first target below the A point and the second target below the C point.
On the other hand, a trader should follow the following steps to open a short position within the bearish Cypher trading pattern:
- Enter a limit order to sell at the 78.6% retracement level of the XC segment. This is known as the D point.
- Place a Stop Loss order above the X point.
A trader should set the first target just above the A point and the second just above the C point swing low.
Bullish Cypher Pattern
The image below represents the typical bullish Cypher pattern.
The initial XA segment forms from the starting point at X.
The AB moves lower to retrace the XA. This retracement should bring prices between the 38.2 to 61.8 level of the XA segment.
The BC segment forms a higher high and terminates between the 127.2 and 141.4 projection of the initial XA segment.
The CD segment moves lower and terminates near the 78.6% retracement level of the price movement from point X to point C.
As soon as the price reaches the 78.6% retracement level at point D, the bullish Cypher pattern is considered valid, and a further price increase is expected.
How to draw a Cypher pattern?
You need to follow the several steps to draw a Cypher pattern.
- First, download and install the custom harmonic pattern indicator. In the MT4 and MT5 terminals, you can locate the harmonic pattern indicator in the indicators’ library.
- Identify the starting point X on the chart, which can be any swing high or low point.
- You should follow the market swing wave movements once you’ve located your first swing high/low point.
- You need to have four points or four 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 described above.
Conclusion
The Cypher pattern is one of the most advanced harmonic structures. However, this pattern has a high probability of success and offers a solid risk to reward ratio.
As well as many other patterns, the Cypher pattern works better when on higher time frames such as the four-hour and above.
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