Cypher pattern is a geometric chart pattern in forex trading technical analysis. Trading geometric chart patterns are far better than lagging indicators. Geometric patterns make some sense because of natural phenomena as everything in this universe has a specific pattern. So using cypher pattern in your trading analysis is a good choice. I’m not saying you use this pattern as a trading strategy. It can also be used to do technical analysis.

We do the analysis of a currency pair to predict its direction. After prediction, we will apply our specific strategy only in the predicted direction which will increase the probability of winning in the trade. Forex is a game of probability so all we have to do is to increase the probability and it works.

Cypher Harmonic Pattern

A harmonic cypher pattern is a five-wave pattern in which the Fibonacci ratio is followed. As Fibonacci is also a natural phenomenon so it makes some sense. Fibonacci is used to increasing probability to filter out weak patterns.

This pattern gives a high risk-reward ratio and winning ratio because of its structure. The psychology behind this pattern is that after two higher highs, the price breaks lower low. This is an indication of a trend reversal but this is actually a trap for retail traders. instead of a trend reversal, the price will make a new higher high. this is the way of stop loss hunting.

Cypher pattern rules

There are also few cypher pattern rules to follow to filter out perfect patterns only from the chart. Five waves of the pattern are indicated by XABCD.

• XA wave is a simple impulsive wave
• AB wave will retrace to 61.8 Fibonacci level. It’s not an exact figure. It can be somewhere between 50 to 78 Fibonacci level.
• BC wave is also an impulsive wave and it must hit inverse Fibonacci ratio 1.272 of AB wave.
• CD wave will also retrace but it must break B point. After breaking point B, cypher pattern is now completed.

Now price will reverse and this final wave will hit the point C and this is take profit level.

Bearish cypher pattern

In the bearish cypher pattern, the XA wave will be a bearish impulsive move. X will be the highest point and A will be the low point. After some retracement, the BC wave will also be a bearish wave and the C point will be the lowest one. These are the simple criteria. Look at the image below for a clear view of the pattern.

Bullish cypher pattern

In the bullish cypher pattern, XA wave will be a bullish impulsive wave. In this pattern, X will be the lowest point and C will be the highest point. After two higher highs, the price will break low indicating a reversal in trend but the price is trapping retail traders. Look at the image below.

How to trade cipher pattern

To trade cipher harmonic pattern, one must know about the invalidation level of this pattern which is a vital part. Because a forex trader can trade patterns as a strategy or do technical analysis. I have already discussed this in the first paragraph. The strategy must be unique to become a profitable trader so I will recommend you to use this pattern to do technical analysis and then using analysis to trade with a specific strategy.

Entry point:

Entry will be just after the break of point B or if you are using this pattern as a strategy. I will recommend you use the candlestick pattern as a confluence. Like pin bar after a break of point B will be a good confirmation to enter in the trade.

Invalidation point:

X point will be invalidation level. Price above point X will be invalidation level in case of a bearish pattern. On the other hand, the price below point X will be an invalidation level in case of a bullish cypher pattern.

Take profit level:

Point C indicates take profit level. TP will be achieved easily in a perfect cypher harmonic pattern. The beauty of this pattern is high risk-reward.

Cypher pattern examples

Live chart examples are below. To make it easy for you to backtest cypher chart pattern, I have attached some live examples.