Fibonacci: Advanced Patterns
Building upon the foundational understanding of Fibonacci retracements and extensions explored in Part 1 (Fibonacci: The Fundamentals), this sequel ventures into the world of advanced Fibonacci patterns.
We introduce the two best known advanced Fibonacci patterns; the Gartley and Cypher. We break the patterns down into their essential components, teach you how to trade them and give you some tips that have the potential to boost the patterns probabilities of success.
Introducing Advanced Fibonacci Patterns
At first glance, advanced Fibonacci patterns can look like a confusing web of letters and numbers, but each pattern as two essential elements:
1. Impulse leg (X-A) – This is the foundation of the pattern. The X-A impulse leg should represent a clear and obvious period of directional price movement.
2. A-B-C-D sequence – This is a combination of Fibonacci retracements and or extensions. Some of these retracements and extensions will be precise and some will specify a zone of acceptable Fibonacci levels.
The patterns present a clear and objective framework for selecting and managing trades. And whilst there will always be a great deal of debate surrounding the use of Fibonacci levels in financial markets, these advance patterns offer a roadmap to consistent trade selection and management which can be applied to many styles of trading.
I. Gartley Pattern
The Gartley pattern has a beautiful harmonic aesthetic. The pattern essentially looks to enter the market on a two-legged pullback from the impulse leg highs. The two-legged pullback should take the market back down to the 61.8% to 78.6% retracement of the impulse leg – creating a trade setup which has attractive levels of risk reward.
Here are the Gartley pattern rules that must be met:
Gartley Pattern
Past performance is not a reliable indicator of future results
How to Trade the Gartley Pattern:
Entry and Stop: Traders typically enter upon completion of the pattern near the D point, implementing a stop-loss below or above point X.
Targets: Point C makes for a clean initial target, with secondary targets coming in at point A – the peak of the impulse leg.
Tip:Rather than simply entering on D – wait for a reversal candle pattern to form. This can help to ensure that your entry is aligned with short-term and can help to tip the probabilities of success in your favour.
Bullish Gartley Example: GBP/USD 4-Hour Candle Chart
Past performance is not a reliable indicator of future results
Bearish Gartley Example: GBP/AUD Hourly Candle Chart
Past performance is not a reliable indicator of future results
II. Cypher Pattern
The Cypher pattern is characterised by an “M” shape when bullish and a “W” shape if bearish. The pattern looks to enter the market following a deep 78.6% retracement of a two-legged trending move up or down. A key point of difference is the Cypher pattern measures the 78.6% retracement from points X-C.
Here are the Cypher harmonic pattern rules that must also be met:
The Cypher Pattern:
Past performance is not a reliable indicator of future results
How to Trade the Cypher Pattern:
Entry and Stop: Like the Gartley pattern, traders typically enter upon completion of the Cypher pattern near point D point, implementing a stop-loss below or above point X.
Targets: Initial target is a 61.8% retracement of point C to Entry level. Secondary targets are a retest of the pattern high/low at point C.
Tip: Zoom out on your price chart and pay attention to the wider market structure. Look to take Cypher patterns which align with the bigger picture trend as this will boost your probabilities of success.
Bullish Cypher Example: EUR/CAD Daily Candle Chart
Past performance is not a reliable indicator of future results
Bearish Cypher Example: GBP/USD Hourly Candle Chart
Past performance is not a reliable indicator of future results
Summary:
Advanced Fibonacci patterns provide traders with structure. They are essentially ready-made trade plans that can help to improve discipline and consistency in trade selection and trade management. Don’t forget to consider the wider market structure when selecting Fibonacci trades and use candle patterns to refine the timing of your entry.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
We introduce the two best known advanced Fibonacci patterns; the Gartley and Cypher. We break the patterns down into their essential components, teach you how to trade them and give you some tips that have the potential to boost the patterns probabilities of success.
Introducing Advanced Fibonacci Patterns
At first glance, advanced Fibonacci patterns can look like a confusing web of letters and numbers, but each pattern as two essential elements:
1. Impulse leg (X-A) – This is the foundation of the pattern. The X-A impulse leg should represent a clear and obvious period of directional price movement.
2. A-B-C-D sequence – This is a combination of Fibonacci retracements and or extensions. Some of these retracements and extensions will be precise and some will specify a zone of acceptable Fibonacci levels.
The patterns present a clear and objective framework for selecting and managing trades. And whilst there will always be a great deal of debate surrounding the use of Fibonacci levels in financial markets, these advance patterns offer a roadmap to consistent trade selection and management which can be applied to many styles of trading.
I. Gartley Pattern
The Gartley pattern has a beautiful harmonic aesthetic. The pattern essentially looks to enter the market on a two-legged pullback from the impulse leg highs. The two-legged pullback should take the market back down to the 61.8% to 78.6% retracement of the impulse leg – creating a trade setup which has attractive levels of risk reward.
Here are the Gartley pattern rules that must be met:
- AB retraces XA by 61.8%
- BC retraces AB by 38.2% to 88.6%.
- CD retraces XA by 61.8% to 78.6%.
Gartley Pattern
Past performance is not a reliable indicator of future results
How to Trade the Gartley Pattern:
Entry and Stop: Traders typically enter upon completion of the pattern near the D point, implementing a stop-loss below or above point X.
Targets: Point C makes for a clean initial target, with secondary targets coming in at point A – the peak of the impulse leg.
Tip:Rather than simply entering on D – wait for a reversal candle pattern to form. This can help to ensure that your entry is aligned with short-term and can help to tip the probabilities of success in your favour.
Bullish Gartley Example: GBP/USD 4-Hour Candle Chart
Past performance is not a reliable indicator of future results
Bearish Gartley Example: GBP/AUD Hourly Candle Chart
Past performance is not a reliable indicator of future results
II. Cypher Pattern
The Cypher pattern is characterised by an “M” shape when bullish and a “W” shape if bearish. The pattern looks to enter the market following a deep 78.6% retracement of a two-legged trending move up or down. A key point of difference is the Cypher pattern measures the 78.6% retracement from points X-C.
Here are the Cypher harmonic pattern rules that must also be met:
- AB retraces XA by 38.2% to 61.8%.
- BC extends XA by 127.2% to 141.4%.
- CD retraces XC by 78.6%.
The Cypher Pattern:
Past performance is not a reliable indicator of future results
How to Trade the Cypher Pattern:
Entry and Stop: Like the Gartley pattern, traders typically enter upon completion of the Cypher pattern near point D point, implementing a stop-loss below or above point X.
Targets: Initial target is a 61.8% retracement of point C to Entry level. Secondary targets are a retest of the pattern high/low at point C.
Tip: Zoom out on your price chart and pay attention to the wider market structure. Look to take Cypher patterns which align with the bigger picture trend as this will boost your probabilities of success.
Bullish Cypher Example: EUR/CAD Daily Candle Chart
Past performance is not a reliable indicator of future results
Bearish Cypher Example: GBP/USD Hourly Candle Chart
Past performance is not a reliable indicator of future results
Summary:
Advanced Fibonacci patterns provide traders with structure. They are essentially ready-made trade plans that can help to improve discipline and consistency in trade selection and trade management. Don’t forget to consider the wider market structure when selecting Fibonacci trades and use candle patterns to refine the timing of your entry.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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