The Insights Of Cypher Pattern
Forex is a global market that involves the buying and selling of currencies. It is a market where shareholders, investors, and retailers influence the value by trading one currency against the other. Successful traders take advantage of these fluctuations in the price movement using various tools. While some depend on price action to analyze the market, others use various indicators to analyze the market. And therefore, the Cypher pattern can be a useful method.
Price movement analysis began during the introduction of a price chart. Initially, charts were drawn on graph paper before the transition to digital charts. The movement of price creates patterns, which many traders observe to make a judgment in their trading. Today, chart patterns are an integral aspect of every trading strategy.
In this write-up, we will explore one of the famous types of harmonic patterns you can incorporate into your trading strategy.
What is Cypher Pattern in Forex?
The Cypher is a simplified harmonic pattern, which can lead to an amazing winning rate when traded correctly. It is a five-point pattern comprising five points – XABCD. Interestingly, it is easy for anyone to spot this pattern on the chart because of its distinctive wave-like characteristics that show when the peak is rising or falling. Similar to other harmonic patterns, traders can use this pattern by waiting for the price to reverse at the end before using pending orders to set profit.
The Cypher chart pattern looks like a butterfly when constructed and where it occurs. Nevertheless, the cypher chart pattern is rare and doesn’t show up regularly. Despite this, it has a high positive expectancy with different rules and conditions that must be met for it to be tagged a cypher chart pattern.
How to Identify the Cypher
For a pattern to be known as a cypher pattern, it must meet specific criteria. Some of these conditions include:
- The area marked B must retrace within the 38.2 and 61.8 percent region of XA. However, it must be within the 38.2 percent without exceeding the 61.8 percent level.
- C is an extension leg, which goes beyond the A point; it must at least reach within the 127.2 percent level. However, it can also range between the 113 to 141.4 percent level. Notwithstanding, if it moves beyond the 141.4 percent level, the pattern is not valid.
- The CD leg must break the 78.6 percent level of the XC point.
- The potential reversal zone of D is the range where the price must reach. Furthermore, the price can move anywhere within the 38.2 and 61.8 percent level.
Compared to other harmonic patterns, cypher has lesser rules; although it is hard to compare the success rate with other harmonic patterns such as Bat and Gartley, it doesn’t show up frequently. Additionally, it is much easier to identify, making it the favorite for most beginners in the forex market. The pattern works better when the forex market is calm but becomes less reliable in a trending market after the news.
How to Trade the Cypher Chart Pattern
To successfully trade the cypher chart pattern, you must understand when the pattern is at its invalid level. Forex traders can use the cypher as part of their trading strategy or depend on technical analysis. We’ve already talked about what the cypher chart pattern entails, but you will learn how to implement this pattern to your trading strategy in this section. The strategy can make you a successful trader if well executed.
How to enter
Everything lies in the entry point when using the cypher strategy. Your entry point will be after the price breaks point B. however, it is never advisable to depend on the pattern alone. You can use a candlestick pattern as a confirmation signal to enter. For instance, when a pin bar pattern breaks point B, it is a good sign to enter the trade.
The pattern is very helpful, especially in risk management, since it has the highest winning rate. Nevertheless, frequent backtesting can prove to be very dependable for your strategy.
Invalidation point for Cypher
Your invalidation point will be at X. Peradventure it is a bearish cypher chart pattern, the price above point X is your invalidation point. Alternatively, in a bullish cypher chart pattern, the price below X is the invalidation level.
Take Profit Level
When using the Cypher strategy, the best point to take profit is the C level. You get a perfect cypher harmonic pattern at this point, even though risk-to-reward tends to be high. There are several ways to make a profit when using the cypher chart pattern. However, the most efficient way is to scale your position at your first take profit level while ending the trade at the second take profit point. Once the price gets to point A, you can take your profit.
Remember, the cypher chart pattern uses a reversal method; therefore, ensure you take as much profit as possible before the trend changes. However, if you don’t like using the reversal strategy, you can follow the MACD trend. Take your profit once the price reaches point A in the pattern.
You can also use the cypher chart pattern to set your stop-loss point. To set your stop-loss, ensure you give at least 10 pips space above point X when using an intraday chart. If you are trading a bullish pattern, the stop-loss must be at least 10 pips lower than the low of X. Nevertheless, it should be at least 10 pips above for a bearish pattern at the high of X.
Problems with using Harmonic Patterns in Trading
Besides the cypher chart pattern, there are other harmonic patterns such as Bat, butterfly, and Gartley. These patterns allow traders to predict when the price is changing and comes with a good risk-to-reward ratio. However, there are problems with using harmonic patterns, and we will look at a few of these.
1. Trading Harmonic Pattern is Subjective
Anyone who considers forex trading as a business would have a trading plan and won’t want to make a subjective decision that will affect their trading plan. Therefore, drawing the harmonic pattern is subjective because you have to determine the impulse leg – X to A. Everything depends on identifying the impulse leg as it is the foundation of all harmonic patterns.
Nevertheless, looking at your chart, you will see the market comprises several impulse legs. How do you decide the right leg to take? It will depend on the trader. On the other hand, the best option is to select the impulse leg that corresponds with support and resistance structure.
2. Stop-loss getting hunted
Another issue with harmonic patterns is that your stop-loss gets hunted if wrongly placed. Most traders are taught to put their stop-loss above resistance or below the support level. Therefore, it is not a surprise to find stops at the high and low of candle wicks.
Since almost all traders place their stops close to the lows and high of candle wicks, it becomes an enticement for market movers to hunt them to get quick profits. However, to avoid getting your stop hunted, you should give your trade adequate breathing space. You can use 2 ATR to determine how far the stop would be. With this, if you get stop hunted, it shows the harmonic pattern has failed.
3. How do you deal with ranging markets?
If you are new to trading, a ranging market is a market situation where the price is not in an uptrend or downtrend. It is merely within support and resistance levels. A ranging market favors harmonic patterns because they are common in such market conditions. Nevertheless, there are circumstances where you might not see harmonic patterns in a ranging pattern, which may cause you to miss opportunities in the market.
If you want to buy in a ranging market, but there is no sign of a bullish harmonic pattern, you can set a limit at the support level. Alternatively, if you want to short in a ranging market without any bearish harmonic pattern, your entry point should be at the resistance level. In all, you want to sell high and buy low.
4. Missing big opportunities in the market
Harmonic patterns are more noticeable in a ranging market because of the way it is constructed. Because of this, most traders miss big opportunities in a trending market. Additionally, when they appear in a trending market, they are usually against the market trend.
In general, harmonic patterns perform poorly in the trending market, so it is logical to avoid harmonic patterns in a tending market. Nevertheless, to capture big moving trends, you need to adopt a reliable trend-following strategy.
Closing Remarks On Cypher Pattern
The forex market has numerous tools that traders can use to analyze the market. The cypher chart pattern is a type of pattern that can be incorporated with any strategy. However, whether it is price action, harmonic pattern, or trend following, they all have their pros and cons.
Nevertheless, taking advantage of the pros is what makes the distinction between a successful trader and one that loses money consistently.
The cypher chart pattern is a simplified harmonic pattern that you can use to determine when to enter a market, profit-taking point, and set a stop-loss for your trades.
Furthermore, you can browse through our website for more such tools and indicators through this link and make better trading decisions.