What Is The Cypher Pattern & How To Trade With It

The Cypher is a five-point Harmonic pattern that describes the price highs and lows, eventually indicating a potential reversal. Darren Oglesbee introduced the pattern. The Cypher pattern frequently appears on the forex charts. The Cypher Pattern strategy is a reversal strategy that shows market trends. A cypher pattern can either be bullish or bearish. It occurs across various financial markets including forex, futures, stocks, and cryptos. Having said that, it is a less commonly seen structure compared to some other harmonic patterns such as the Gartley, Bat, and Butterfly patterns.

What is the Cypher pattern?

The Cypher forms peaks and troughs of the price (like support and resistance levels) in a five-point pattern (X, A, B, C, and D) that are also known as legs.

These five legs use Fibonacci numbers and ratios to calculate the retracement between each other.

We have discussed the Fibonacci numbers and ratios in detail, which you can check here.

Like any other Harmonic pattern, the Fibonacci levels of the Cypher needs understanding. When looking for the pattern on a chart, a trader needs to follow certain rules. They are:

  • The pattern opens with the legs X and A. These legs determine the evolution of the Cypher pattern.
  • From point A, the price moves to point B that shows a retracement of 38.2% to 61.8% of XA.
  • The C point comes next with the price extension between 113% to 141% of the XA leg.
  • The point D occurs at the retracement of 78% of the XA leg.
  • The D leg is the last leg that confirms the establishment of the Cypher pattern.

This is how the Cypher looks on the chart:

Cypher pattern on a chart
Cypher pattern on a chart

The Cypher is a well-known pattern, but it is the inverse of the commonly recognized Butterfly Harmonic pattern. The difference between the two lies at the C point. The C leg rally stronger in the Cypher pattern.

It’s easy to get confused between the Cypher and butterfly patterns. Both harmonic patterns have a similar formation, and they appear in the same place and signal that the price is about to reverse. The main difference lies in the Fibonacci ratios and, more importantly, the location of point C. In the butterfly chart pattern, the C point is placed below or above the A point, for a bullish or bearish pattern respectively. On the other hand, the formation of the Cypher pattern is the opposite of the butterfly pattern.

How to use the Cypher pattern?

In the harmonic pattern world, the Cypher pattern is a four leg reversal pattern. The pattern follows specific Fibonacci ratios. The Cypher pattern appears less frequent than other harmonic patterns. This is because it’s hard for the market price to satisfy such rigid Fibonacci ratios. The Cypher pattern forex needs to satisfy the following Fibonacci rules:

  • AB= 0.382 to 0.618 retracement of the XA swing leg
  • BC= extend to minimum 1.272 and maximum 1.414 of the XA swing leg
  • CD= retrace to 0.786 of the XC swing leg

Before implementing, traders need to understand the variations of the Cypher pattern; bullish and bearish.

Bullish Cypher pattern

The bullish Cypher pattern emerges in a downtrend and indicates a price reversal at point D. It looks similar to M.

Bullish Cypher Pattern
Bullish Cypher Pattern

Bearish Cypher pattern

The bearish Cypher pattern surfaces in an uptrend and signals a downward price movement at point D. The pattern resembles W.

Bearish Cypher Pattern
Bearish Cypher Pattern

To trade the bullish and bearish Cypher patterns, traders take their positions at the point D. However, sometimes the price goes against the will of the Cypher. In these situations, traders could use two options:

One is to wait for the Cypher to fully develop, and take their trading positions after point D. In this way, if the price goes sideways, traders wouldn’t have taken their positions, and they wouldn’t enter the trade.

Second, is to use other technical indicators with the Cypher pattern. For example, with the Cypher pattern, one could apply momentum oscillators to confirm the market situation, and trade according to these analyses.

Cypher pattern trading strategy

The Cypher pattern can be used in a smooth market. If there is a certain event or news, the pattern may become less reliable. Besides this, the longer the timeframe, the more obvious the formation of the Cypher pattern can be.

For short-term traders, they may wish to look for the pattern on longer timeframes to further strengthen their forex trading strategy.

Cypher pattern buy strategy

  • Locate the pattern in a downtrend.
  • Wait for the price bar to go bullish before entering.
  • Enter the trade at point D.
  • Place a stop-loss near the recent low from point D.
  • Exit the trade before the price drops.

Cypher pattern sell strategy

  • Navigate the pattern in an uptrend.
  • Wait for the price bar to go bearish before entering.
  • Enter the trade at point D.
  • Place a stop-loss near the recent high from point D.
  • Exit the trade before the price rises.

Cypher pattern conclusion

The Cypher harmonic pattern is a technical analysis indicator used by traders to identify valuable support and resistance levels based on the Fibonacci sequence of numbers and detect trend reversals. It is a possible identifier of the price reversal. The pattern does frequently emerge on the charts, but traders could confirm its formation on longer timeframes.

The Cypher Pattern can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.

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