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How to Trade The Cypher Harmonic Pattern

  • 6 mins read
Cypher Harmonic pattern, forex trading

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.

Here, in this article, we explain how the Cypher harmonic pattern works, identify it, and trade it.

What is the Cypher Harmonic Candlestick Pattern?

The Cypher harmonic pattern is a technical analysis formation indicating a price-action reversal.

The pattern was discovered by Darren Oglesbee and is known as a relatively advanced pattern formation. In structure, the Cypher pattern is similar to the butterfly harmonic pattern; however, the Cypher is not a very common chart pattern due to its unique Fibonacci ratios.

Other widely used harmonic geometric patterns include the Gartley pattern, the XABCD pattern, AB=CD pattern, the bat pattern, shark pattern, and more.

The Cypher pattern, which can be either bullish or bearish, has five points (X, A, B, C, and D) and four legs (XA, AB, BC, and CD). Like any other harmonic pattern, the theory behind the Cypher chart pattern is that there is a strong correlation between Fibonacci ratios and price movements. 

Eventually, the market is expected to reverse from point D after the four market swing wave movements – X to A, A to B, B to C, and C to D.

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How to Identify and Use the Cypher Harmonic Pattern in Forex Trading?

Much like any other harmonic chart pattern, several conditions must occur so you can identify the Cypher pattern: 

  • B point retracement of the primary XA leg ranges between 38.2% to 61.8% Fibonacci levels
  • C point is an extension leg with a Fibonacci ratio that should be between 127.2% to 141.4% of the primary XA leg 
  • D point should break the 78.6 retracement level of XC

Taking the above in mind, let’s see what the Cypher harmonic pattern looks like on a trading chart. 

Cypher Patterns Trading Method

The EUR/JPY 1H chart above shows us how the bullish Cypher pattern is formed by the two tops (A and C) and three bottoms (X, B, and D). Moreover, all the Fibonacci ratios match the pattern’s requirements, and indeed, the D point serves as a bullish reversal point.  

How to Trade Forex Using the Cypher Harmonic Candlestick Pattern – Strategies, and Examples

Now that you know what the Cypher pattern looks like on candlestick charts and how it works, the next step is to figure out how to use and trade this unique chart pattern.

However, before explaining how to trade the pattern, you must first know that you can draw the pattern with a Cypher built-in feature available on most trading platforms (including the Cypher Pattern indicator on MetaTrader4). To do so, you need to locate the X point and automatically stretch the lines and create a zigzag pattern. 

After you grasp how to draw the Cypher pattern on a price chart, you need to find where and when to enter a valid Cypher pattern trade, set a stop loss, and take a profit target. Make no mistake, trading the Cypher chart pattern is not easy, especially compared to other basic classical chart patterns

You need to learn how to do it correctly, and drawing this reversal pattern requires a lot of effort. At the same time, if you believe in harmonic patterns and geometrical shapes in forex trading, which tend to be very reliable, you should learn how to use the Cypher pattern trading strategy.

In many opinions, it is the most exciting harmonic pattern with a high success rate. 

That said, let’s see how you can trade the Cypher pattern.

Cypher Pattern – Find an Entry Point

Like other harmonic patterns, the thing with any harmonic Cypher pattern is that the Fibonacci ratios between the points have to match for the pattern to validate, or you do not take the trade. This is how it works with harmonic chart patterns – they have exact numbers and shapes that must occur for a trade to be made. 

So, once the pattern is confirmed at point D, a trader will enter a position at this level. Yet, you always want to increase the chances of success rate when using chart patterns.

To find the ideal entry point, you can use any trend reversal indicator that can assist you in confirming the reversal. Such tools include the RSI, MACD, and Stochastic.

Bullish Cypher Pattern Forex Example

Cypher Pattern – Set a Stop Loss

Since the Cypher pattern is based on Fibonacci levels, it is helpful to draw Fibonacci retracement levels from the lowest to the highest point of the previous trend on a higher time frame. It will help you better visualize the asset’s past performance. 

However, locating a reasonable stop-loss level when trading the Cypher pattern is simple and does not necessarily require the combination of Fibonacci retracements.

All you need to do is to place the stop loss somewhere below the D level because if this level breaks, the entire Cypher pattern is invalidated. So, stop would be placed at the next support or resistance level, which is the X-point (as you can see in the chart below).

Cypher Advanced Harmonic pattern, Stop loss

Cypher Pattern – Set a Take Profit Target

Lastly, you need to locate profit targets. The simple Cypher pattern trading method is using its points as profit targets, meaning the B, A, and C levels. Another way to find take-profit targets is to draw Fibonacci retracements using the previous primary price swing.

As you can see in the EUR/JPY 1H chart below, the Fibonacci tool helps you find take profit targets, and you can set your orders at any one of the following Fibonacci retracement levels.

Bullish Cypher Pattern, Take Porfit

The Cypher Harmonic Pattern – Pros and cons

Pros

  • Highly accurate chart pattern
  • Entry point, stop loss, and take profit targets are well defined
  • One of the most profitable harmonic patterns

Cons

    • An advanced charting pattern – not suited for beginners
    • Cypher harmonic patterns are difficult to trade, particularly in lower time frames
  • Requires more effort than other technical analysis tools and trading strategies

Key Takeaways

In conclusion, here are the key takeaways:

Key Points to Take Away
  1. The Cypher is a harmonic trend reversal candlestick pattern that helps traders get a signal of the end of the existing market trend
  2. While trading the Cypher harmonic pattern indicator, traders must follow a set of rules. If the Fibonacci ratios between the five points don’t match, a trade should not be made
  3. Once the Cypher pattern is identified, a trader enters a position at the D point with a stop loss below or above the X level (bullish Cypher pattern or bearish Cypher pattern)
  4. Take profit is placed at B, A, or C levels or at one of the following Fib levels
  5. It is recommended to confirm the reversal with other technical indicators. These include RSI, Stochastic Oscillator, MACD, and Fibonacci retracement levels

FAQs

How to draw the Cypher pattern on charting software?

As we mentioned earlier, there’s no need to manually draw the Cypher pattern on Japanese candlestick charts. Instead, you can use a built-in indicator that automatically highlights the Cypher harmonic patterns. 

How accurate is the Cypher harmonic chart pattern?

The Cypher harmonic pattern has been historically proven to be a fairly reliable and accurate chart pattern. According to various studies, the pattern has an accuracy rate of around 70%. 

What is the difference between Cypher harmonic patterns and Butterfly patterns?

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.

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