The Cypher Pattern
Kriss, Passionate Developer, Trader
CEO of AzurItec sas – Founder of Ninja-Addons.com
It was Darren Oglesbee who discovered the Cypher pattern in trading. Visually, it is an inverse pattern of the Butterfly.
Technically an advanced formation, the Cypher structure has particular Fibonacci measurements for each point. Though it works on any time frame and market, to be on the safe side, it is advisable to choose higher time frames.
It does not occur as frequently as the Butterfly and is unique as it is defined by specific rules.
Description of the Pattern
The Cypher pattern has a typical extension where point C goes much beyond point A. This structure is considered to have a high success rate.
Although the occurrence of the Cypher pattern is rare, it is not a high probability setup. You need to make adjustments to the Fibonacci levels since this structure is not often spotted.
In appearance, it looks like the letter ‘M’ for bullish patterns and ‘W’ for bearish patterns.
The Cypher pattern begins to form when points X and A are established on the stock price. The pattern starts to evolve once this leg is determined.
- Point B retraces 0.382–0.618 Fibonacci level of XA
- Point C is formed when the stock price extends the XA leg by at least 1.272 or within 1.130–1.414 of the Fibonacci extension level.
- On the retracement of 0.782 Fibonacci level of XC, point D is formed. You can also expect the price to reverse at point D.
- The targets can be placed at 0.382 and 0.618 Fibonacci retracement levels of CD.
Below are the images of the bullish and bearish Cypher patterns.
Rules of Trading in this Pattern
Stop losses are placed a few notches below or above the high or low of point X.
The stop generally goes beyond the next structure support or resistance beyond the X-point. If you are a conservative trader, however, you may want to look for additional information to confirm the pattern before entering trade.
The Cypher pattern, therefore, begins with an impulse leg, a small correction and then extension of the impulse leg followed by a big correction.
The Cypher pattern is a trend continuation pattern. The stop loss is usually placed a few steps below or above the farthest possible D level. For a safe target, you want to focus on 38.2–61.8% of the CD leg.
You want to enter the market with a limit order or a price that reverses from D. Remember that the ratio line between A and C signifies how far C extends the XA leg.
It is noteworthy that all entries need to be tested for the risk/reward ratio. Those with low risk/reward ratio can either be rejected or need to be treated carefully.
Among all the harmonic patterns, the Cypher is perhaps the most exciting as its winning rate is the highest. However, waiting for the perfect Cypher pattern requires patience and the trader has to observe the price chart for a long time before he/she is sure of the validity of the setup.
Did you know ?
One fantastic thing with advanced trading software like NinjaTrader 8, is that it is possible to create indicators that automate the pattern recognition so you can focus on the trading decision.
This is the case of the Harmonic Indicator that we developed at NinjaAddons.com.
With this tool, you can visualize 9 Harmonic patterns, such as : ABCD, Bat and Alt Bat, Butterfly, Crab and Deep Crab, Cypher, Gartley, Shark, Five-O and Three Drive patterns.
From the toolbar you can configure everything and see the results in real-time without having to reload the chart, configure audio alerts to know when a pattern is detected.
Finally, it is also compatible with the Market Analyzer to build powerful market scanners, and even create your own strategies thanks to the fully exposure of patterns from the code (for experienced programmers).
However, always keep in mind that it is namely you and not the indicator which decides when to trade in the market. Instead of robot trading, you need to take inputs from the pattern and exercise your better judgement to reap the maximum benefit.