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.

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.

How to use the Cypher pattern?

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 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.

I would prefer to use the majority of candlestick patterns such as the Cypher Pattern on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels, candlestick pattern has been formed or a particular indicator value has been reached.

The Cypher Pattern is just one method of market analysis amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing the Cypher Pattern into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the Cypher Pattern, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!