USDJPY - the Cypher pattern explained.

20 באפר׳ 2015

A bearish Cypher pattern is forming on this popular currency pair. It may look a bit weird, but it all points from X to C lign up nicely for a cypher pattern formation. Whether it will complete or not, I wanted to use this opportunity to give an explanation on this pattern.

How do you recognize a cypher pattern ?

The Cypher pattern was discovered by Darren Oglesbee from Trade Empowered and I have been told that at some point this was the only pattern he traded, and was very succesful at it as well as these patterns have a high success rate. This is a so-called "extension pattern", where the impulse leg (XA) is not the longest leg of the pattern but the C point extends beyond A.

What are the criteria ?

B-point : should see a minimum of 0.382 retracement of XA and cannot close beyond the 0.618 extension of that same leg.

C-point : should reach at minimum the 1.272 extension of the XA leg and cannot close beyond the 1.414 extension of that leg.

D-point : lies at the 0.776 of the complete XC move. Ideally you would look for some previous structure as well.

Where do stops go ?

As with any Harmonic pattern, stops exceed X with a certain number of pips (fixed number or defined by ATR)

Profit targets ?

Traditional targets apply :
Target 1 : 0.382 retracement of CD leg
Target 2 : 0.618 retracement of CD leg

You will notice that the Risk/Reward ratio is not ideal here and barely reaches a 1:1, however since this pattern is so successful, with Target 2 often reached as well, it's definitely worth it. This pattern occurs in the market quite often, so learning how to recognize it is definitely to your advantage.

Hope this was useful !!! Leave your comments below.