In this week’s Technical Analysis, I’m looking at a potential Cypher pattern developing on Cable (GBPUSD)…
Firstly just a quick breakdown of what a Cypher pattern is for anyone not in the know; A Cypher pattern is an advanced pattern formation which some may interpret as Harmonic Pattern Trading and can be either a bullish or bearish set-up. It’s mainly based off of Fibonacci measurements for each point within its structure – which once complete allows you to enter the market.
Looking at Cable today and having done some analysis to see if it meets the requirements of a bullish Cypher pattern – we are almost at completion stage and are just awaiting confirmation to enter a Long position.
4 Hour Chart
This potential Cypher pattern began forming around the 24th April (2019) with the A & B leg completion forming around the 5th May. When we feel we may have discovered our initial rally (X to A leg), we pull out the Fib retracement tool to confirm if we have a B leg completion; which is confirmed if the market pulls back, touches or crosses the 0.382 Fib level but does not close below the 0.618 – as you can see, so far so good.
Now in order to confirm our C leg and positioning within the structure, we pull out our Fib extension tool and draw in from X to A back to X. To conclude our C leg, price must touch or cross the 1.272 Fib extension but cannot close above the 1.414 extension level – as you can see once again the market has met these requirements perfectly.
Here is where we are waiting for the Cypher pattern to proceed and complete its D leg - the good thing at this stage is we’re able to draw in the area that the market must reach in order for us place our long entry. To work out where our D leg needs to reach in order for completion, we place a Fib retracement from X to C and our completion level sits at the 0.786 Fib. If the market is to reach here, reject and form candle stick confirmation we can look to enter our long position.
This really helps to trade mechanically and take the emotion out of the picture – there is no ‘I think the market will do this’ moment - instead we are now working with probability rather than gambling. Below I’ll look at what profit targets we can aim for if this trade comes into fruition…
Lastly, we take our Fib retracement tool and place from C to D…
From here we look at a profit target 1 of the 0.382 level and a profit target 2 of 0.618 level, with a stop loss sitting 20(ish) pips below X.
• Profit Target 1 = Will give us around a 1:1 risk/reward ratio
• Profit Target 2 = Will give us around a 1.5:1 risk/reward ratio
Here’s how I’d look to manage taking profit during this trade; I’d wait for profit target 1 to hit and at that stage move my stop loss to risk-free, leaving me with no more risk on the table. I’d then proceed to monitor how the market reacts around the 0.382 level – if I see a rejection/reversal coming into action, I’ll close my trade in profit. Or if the bulls stay strong and price continues to break through profit target 1, I’ll be happy to hold (risk-free) until my profit target 2 is met.
At the time of writing this, the market still needs to fall around 80 more pips down to the 1.293 level in order to confirm our D leg completion. So for now, we stay disciplined, we stay patient and we let the market do it’s thang.
Anyone else have their eyes on this market or a similar set-up? I look forward to your thoughts.
Disclaimer: Any statements non-factual in nature constitute only current opinions, which are subject to change. The information presented in this article is not a specific buy or sell recommendation and is presented solely for informational purposes only. Not to be taken as financial advice.