Cypher Harmonic Pattern: Definition & Strategy

Harmonic patterns

Bullish & Bearish Cypher Patterns

The cypher pattern trading strategy teaches traders how to correctly trade and draw the cypher pattern. The cypher harmonic pattern can be used on its own and provide traders a profitable forex trading strategy.

It is not surprising that geometric patterns are used in forex charts. And the cypher harmonic pattern is a very good representation of that. The pattern is part of the harmonic trading patterns and is the most exciting harmonic pattern because it has the highest winning rate.

This is one of the few patterns not identified by Scott Carney. It was discovered by Darren Oglesbee, and though it is technically an advanced pattern formation, it is often linked with and traded together with harmonic patterns. It has particular Fibonacci measurements for every point within its structure.

  • The Cypher harmonic pattern is a reversal pattern
  • As other XABCD patterns, it has 4 legs
  • It follows strict fibonacci ratios

What is the Cypher pattern?

The cypher pattern is an advanced harmonic pattern that, when traded correctly, can have a truly outstanding strike-rate as well as a pretty good average reward-to-risk ratio.

The cypher is a five-point pattern, composed of points XABCD. It is easy to spot on a chart due to its characteristic wave-like look, displaying either rising peaks or falling valleys. Traders can trade it like other harmonic patterns, by waiting for a reversal at the end and then using pending orders to profit from any potential breakout.

This pattern looks like the butterfly in both its construction and where it will occur (close to the end of trends). However, the cypher pattern is rare and not one that shows up frequently. But don’t confuse rarity with being more powerful or profitable. 

It is known to have a high positive expectancy, no different than a bat or alternative bat. Just like all other harmonic patterns, the Cypher has specific rules and conditions that must be met for it to be a particular cypher pattern.

How to identify the Cypher pattern?

The pattern must verify a few conditions to confirm:

  1. B has to retrace to an expansive range between 38.2 and 61.8 percent of XA, at least 38.2 percent, but not exceeding 61.8 percent.
  2. C is an extension leg and goes beyond A – but must move to at least 127.2 percent, but it is normal for it to go as far as the 113 to 141.4 percent. It is considered invalid if it moves beyond the 141.4 percent.
  3. CD leg should break the 78.6 percent level of XC.
  4. The PRZ (potential reversal zone) of D is a wide range where the price has to get to. Price can move anywhere between 38.2 to 61.8 percent.

Cypher has less rules to follow compared to other harmonic patterns. Although its successful rate has nothing special compared to Gartley or Bat, the frequency of showing up and the ease of rules make this pattern become the favorite for all beginner traders. This pattern works best when the market is calm. In a strong trending market, especially after the news, the cypher pattern becomes less reliable. The bigger the pattern (the longer it takes to form the pattern), the stronger the support/resistance it gives.

What does the Cypher pattern tell traders?

The ‘B’ Rule

Even though not many people apply it, it is an important rule. The rule basically states that B cannot touch the 78.6 percent retracement of X to C, including the candlestick wicks.

Bullish and Bearish Cypher Patterns

In any cypher, points X, C and D are the most important points. For a bullish cypher pattern, X should be the pattern low and C the pattern high. A bearish cypher pattern makes its high at X and its low at C.

In the bullish cypher pattern, the points A and C has to make successively higher highs and point D has to be above X. In the bearish cypher points A and C have make successively lower lows and point D should be below X.

Market Psychology

The cypher is a technical wave pattern in which the market is trending but it makes sharp reversals during the day. The important point of the bullish cypher is that both the lows and the highs are trending upwards. For the bearish pattern, the opposite happens. 

If the cypher completes successfully with a reversal taking place at point D, it may eventually become a trend channel where the price moves between the highs and lows. Cyphers can also appear inside price channels that are already formed.

How to trade when you see the Cypher pattern?

While trading the cypher pattern, you will apply a set of simple rules. They will try to minimize risk and maximize profits. Even though there is one more important step to learn before defining the cypher pattern trading strategy rules.

Step 1: Drawing Cypher patterns

  • Click on the harmonic pattern indicator located on the right-hand side toolbar of the TradingView platform.
  • Identify the starting point, X, on the chart, which can be any swing low or high point.
  • Once you’ve located your first swing high/low point, follow the market swing wave movements.
  • Every swing leg has to be validated and abide by the cypher pattern forex Fibonacci ratios.

Step 2: Trading process

Now that you know how to identify and qualify the harmonic cypher pattern, it’s time to trade the pattern. Standard methods of trading the cypher pattern include:

Entry point

The cypher pattern may be the most exciting harmonic pattern for risk management, because it has the highest winning rate. Backtesting results have continuously proven the cypher pattern forex is a very dependable harmonic pattern.

Next, buy with a market order at the first candle preceding the completion of the D point at 0.786 Fibonacci retracement of the XC leg. Once the market touches the 0.786 level, wave D is in place, because you can’t control how far the market will go.

When the CD leg gets to the 78.6 percent retracement level, the cypher pattern is complete and valid. However, the 78.6 percent Fibonacci retracement level of X to C also acts as the standard entry point for a valid cypher pattern trade.

Take profit

There are some ways to take profit with this pattern, but the standard method is to scale out of your position at the first take profit level and end the trade at the second take profit level. Take profit once you get to point A. To get to such levels, draw a Fibonacci retracement of the CD leg.

The cypher patterns trading method is a reversal method. Make sure you capture as much as possible from the new trend. If you’re not a fan of reversal strategy, and you prefer a trend following strategy, follow the MACD trend following strategy-simple to learn another strategy. The strategy has attracted a lot of interest from the Forex trading community.

Ensure you take profits once you reach point A of the pattern, because it has conservative take profit target.

So, why should you take profit so early?

For the most part of the harmonic patterns, it’s best to lock in profits as soon as possible. Since the cypher pattern is one of the most profitable harmonic patterns, you can give it more room for the price action to breath. You have the chance to at least see a retest of the wave A.

Stop-loss

Ensure you give your trade at least 10 pips space above X in the intraday charts. While trading a bullish cypher pattern, place the stop-loss at least 10 pips lower than the low of X. For a bearish pattern, place the stop-loss at least 10 pips higher than the high of X. That’s the only logical place to hide your stop-loss, because any break below will automatically invalidate the trade.

Want to know which markets just printed a pattern?

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