The Quasimodo Pattern Trading Strategy: What You Need to Know

TLDR (Too Long Didn’t Read):

Quasimodo pattern: a trading strategy that uses price swings to spot trend reversals. It has a hunched shape and shows supply and demand imbalance. It works with other indicators and needs risk management. It is effective but challenging. It can be applied to any market and any time frame, as long as there is enough price movement to form the pattern. This guide shows you the key details, samples and methods of trading with it.

What is the Quasimodo Pattern?

Pattern	Quasimodo Pattern
Type	A reversal pattern in price charts, used to predict bullish or bearish shifts.
Occurrence	Appears after a clear trend, signaling a potential reversal.
Shape	Characterized by a specific series of highs and lows forming a distinctive pattern.
Meaning	Indicates a shift in market sentiment and a struggle between buyers and sellers.
Confirmation	Requires validation through additional indicators or price action for reliable trades.
Components	Includes elements like the Quasimodo Line (QML) and Maximum Pain Level (MPL).
Psychology	Reflects the changing conviction among traders, showing a loss of momentum in the prevailing trend.
Trading Strategy	Involves identifying the pattern, considering market context, and managing risks effectively.

The Quasimodo Pattern Trading Strategy is a smart way to trade in money markets, especially in forex trading. It can find when the market trend might change. It does this by looking at how the prices move and how people feel about them. Central to the Quasimodo (QML) pattern is the series of higher highs (HH) and lower lows (LL) it forms, creating a zigzag formation on the charts. This pattern is

It is based on the idea that after a series of higher highs and higher lows (in an uptrend) or lower lows and lower highs (in a downtrend), the price will break the market structure and form a new high or low that signals a change in the trend direction. The Quasimodo pattern is also known as the Over & Under pattern, because it involves a price level that is first overpassed and then underpassed by the price.

The formation of the Quasimodo typically follows a strong trend, suggesting a possible trend reversal. It is recognized by a specific sequence of price movements, where a higher high is flanked by two lower highs, forming a resistance level.

Conversely, a lower low surrounded by two higher lows creates a support level. This pattern indicates a shift in market forces, highlighting an imbalance between supply and demand.

We use a short name to show the Quasimodo structure on the chart.

Quasimodo = QM
Quasimodo Line = QML

Qml and Qm are the same thing. Some traders write QM and select it as a zone. Other traders like to use QML as a line.

Rules of Recognition:

1. Pattern Identification: Look for a specific sequence of price peaks and valleys.
2. Trend Context: Analyze the pattern within the existing market trend.
3. Reversal Signal: Use the pattern to identify potential trend reversals.
4. Market Application: Applicable in various markets like stocks, forex, and futures.
5. Accuracy Emphasis: Relies on accurate pattern and trend identification.

Types of Quasimodo Pattern:

Bullish Quasimodo Pattern:

It shows up when the prices are going down. The prices go above the last low point before going down. This makes a new high point. We wait for the prices to come back to the QM zone and join the rising trend.

Bearish Quasimodo Pattern:

It is the opposite of the bullish one. It shows up when the prices are going up. The prices keep making new high points. The low points between these highs are called Higher Low.

From the last high point, the prices drop to a new low point. This breaks the market pattern. We wait for the prices to come back to the QM zone and join the falling trend.

What are the Limitations of Using Quasimodo Pattern Strategy?

Despite its effectiveness, the Quasimodo pattern is not without challenges. It requires a manual approach to trading and can be complex to integrate into automated trading algorithms.

Additionally, trend reversals carry inherent risks, particularly from market manipulations by large players, which can impact retail traders negatively.

It requires mastery of the market structure. If you are not sure or lost about the market structure, I give you 3 things to study. Learn them and see how they fit together.

• Higher Highs Lower Lows
• Swing Highs and Swing Lows
• Market Structure Break (MSB)

What is the Maximum Pain Level (MPL)?

Quasimodo is a hard pattern. It has many different cases that need more explanation. So I will only explain the basic idea of MPL.

Maximum Pain Level means the highest point of this strategy. It is where the price tricks you and makes you lose money if you trade wrong. The highest point of the fakeout, or the start of the QML, is called the maximum pain level. It is the best place for the stop zone.

How to Trade Using the Quasimodo Pattern Strategy?

To trade the Quasimodo pattern, you need to follow some simple rules.

For a bullish Quasimodo pattern, the rules are:

• A prevailing downtrend needs to be visible – a series of lower lows followed by a series of lower highs.
• Break in the market structure – price starts to make higher highs.
• Place a buy order near the left shoulder.
• Hide the protective stop-loss below the last lower low.
• Take profit near the first peak of the Quasimodo chart pattern.

For a bearish Quasimodo pattern, the rules are:

• A prevailing uptrend needs to be visible – a series of higher highs followed by a series of higher lows.
• Break in the market structure – price starts to make lower lows.
• Place a sell order near the right shoulder.
• Hide the protective stop-loss above the last higher high.
• Take profit near the first valley of the Quasimodo chart pattern.

Profitable Examples of the Quasimodo Pattern:

Look at the example above. The prices are going up. Focus where I indicate with the yellow highlighter. The market structure breaks (msb) after the last peak. When we see the Quasimodo shape, we wait for the prices to come back to the purple area. Our stop point is the highest point of the last Higher High (HH).

The examples below are like the one before. Market breakout and make a Qm shape. This gives us a good chance.

Now let’s look at some examples of prices going down. See the picture below. The prices are falling on our chart. The last low point before going up is broken. This makes a new high point. Our Qm shape is formed after the market breakout. We wait for the prices to come back to this zone and join the trade.

The Difference Between Quasimodo Pattern and Breaker Block

Breaker Block (BB): This is when the prices break an old high or low point, then come back to it, and then go in the same direction. It looks like a broken line.

You need BB to have QM. They are different ways to trade, but they also support each other. If you trade Breaker Block, you can use QM to be more sure. If you look at the chart and see the prices have changed direction, you can use QM to join the trade if you missed BB.

The Difference Between Quasimodo Pattern and Order Block

Order Block (OB) is the last candle before the prices change direction. The Order Block is green when the prices are falling and red when the prices are rising. We mark the zone made by this bar and expect the prices to bounce from it if they come back.

QM is a shape that happens after the Order Block. The only difference between trading them is that the prices may not touch the OB. We can say “the prices turned around before touching the OB”. This is where QM helps us. Because by trading QM, we join the trade sooner.

You may wonder this question. “We put our stop above the Order Block when trading QM and OB. What is the benefit of Quasimodo then?” There are 2 answers to this question:

1. Yes, our stop point is OB. But what if the prices bounce from the QM level before reaching OB and keep going? Then we will lose the chance to trade. If the prices touch both QM and OB, then we can trade both QM and OB. This way, we will gain more from the trend change.
   
2. The best stop distance for QM trading is the OB level. But maybe there is a Hidden Base or a Failure to Return FTR at the QM level. Then we don’t have to stretch our stop to OB. Or we see a good reversal candlestick pattern on the smaller timeframe. Then we don’t have to stretch our stop to OB either. As you can see, there are other options. Using a combination of price action concepts will make you better.

The Difference Between Quasimodo Pattern and Head & Shoulders

The quasimodo pattern is not the same as the head and shoulders pattern. While they are similar reversal patterns, there are some key differences between them. They have different shapes and entry points.

QML has a lower low or a higher high in the middle, while the head and shoulders pattern has a neckline at the same level.

To trade the head and shoulders pattern, you can enter at the top of the right shoulder or after the break of the neckline.

To trade the quasimodo pattern, you can enter at the QM level or after the break of the previous low or high. You can place your stop above the head or the order block for both patterns.

Key points to compare the quasimodo pattern and the head and shoulders pattern:

• Formation: The head and shoulders has three peaks – a left shoulder, a head, and a right shoulder. The quasimodo has two higher peaks with a smaller peak in the middle.
• Middle Peak: In the head and shoulders pattern, the middle peak (head) is the highest. In the quasimodo pattern, the middle peak is the lowest of the three peaks.
• Breakout Levels: The breakout level is lower for the quasimodo pattern than for the head and shoulders. This suggests the quasimodo reversal may be more significant.
• Reliability: The quasimodo pattern is considered more reliable as a reversal indicator than the head and shoulders pattern.

Top 6 Tips for Trading the Quasimodo Pattern:

1. Be patient and wait for a clean break and close outside of the Quasimodo pattern before taking a position. Wait for the pattern to be fully formed before entering a trade, as premature entries can lead to false signals and losses.
2. Recognize the Quasimodo structure – a high, a higher low, a higher high, a lower low, and a lower high.
3. Pay attention to key support and resistance levels which can impact the effectiveness of the pattern.
4. Use stop-losses to limit potential losses if the breakout fails. Use the head of the Quasimodo pattern as a stop-loss level, as it represents the most recent extreme in the market and a potential reversal point.
5. Identify overextended moves. Look for price movements that extend significantly from the mean, as the Quasimodo pattern often forms after such moves.
6. The Quasimodo pattern is not a rigid or fixed formation, and it can vary in shape and size. It does not look the same every time. Don’t expect a uniform pattern. You might see more complex QML shapes too.

Common Misconceptions When Trading with Quasimodo Pattern:

• Trend reversals are generally not risky.
  
  Correction: No, trend reversals are usually dangerous. Big traders can use the feelings of small traders to make money. When easy spots like the QML shape are tricked, it could hurt small traders.
  
• QML shapes are not good.
  
  Correction: No, QML shapes are good for traders because they have a high risk-to-reward ratio. This means that traders can make more money from winning trades than they lose from losing trades. QML shapes also help traders to catch the opposite trend, which can be very profitable, especially if the trend lasts for a long time.
  
• QML shape is hard to see.
  
  Correction: Wrong, some QML shapes are tricky, but not all. The QML shape has a clear form that you can spot. You can see it better if you use a line chart.

See Also: Trade Imbalances with FVG and LV

Psychology and Scenario Behind the Quasimodo Pattern:

This pattern in trading shows a change in market mood and a conflict between buyers and sellers. First, there is a strong trend in one way, showing one group’s dominance.

Then, there is a reversal, showing a big shift in market thinking. It means that the dominant group is losing power, and the other group is getting stronger.

It’s a fight of market belief, where the first confidence is beaten by a stronger opposite force, leading to a possible trend change.

The psychology behind it is that traders join a possible breakout and push prices up briefly.

But, there is not enough real demand to keep the move. Prices then go back to the old trading range as early buyers sell and new sellers join, leaving those who joined the false breakout losing money.

Conclusion:

Overall, the Quasimodo Pattern Trading Strategy, with its emphasis on early trend identification and low risk exposure, has become a reliable and powerful tool in the arsenal of many traders.

Its ability to offer significant insights into market dynamics makes it a valuable strategy, especially when combined with other technical analysis tools for enhanced accuracy and risk management.

It is not based on indicators, so it does not lag behind the price action. However, traders should always use other tools and techniques to confirm the validity of the pattern and to manage their risk

See Also: Blind Spot

FAQs:

How does the Quasimodo pattern trading work?

📌It works by using the swing highs and swing lows as entry and exit points.

📌For a bearish reversal, traders can sell near the right shoulder and place a stop-loss above the last higher high.

📌For a bullish reversal, traders can buy near the right shoulder and place a stop-loss below the last lower low. The take profit target can be set near the first valley or peak of the pattern.

What are the differences between the Quasimodo strategy and the head and shoulders pattern?

🔑These patterns are similar in shape, but they have some differences.

🔑The QM strategy has a lower right shoulder than the left shoulder, while the head and shoulders pattern has a symmetrical shape.

🔑The Quasimodo strategy also has a lower low after the second high, while the head and shoulders pattern has a higher low.

When is the best time to trade the Quasimodo trading setup?

The best time to trade this trading setup is when the market is in a strong trend, either up or down. The shape tells you when the trend might change, so you can trade against the trend.

How do you place a buy / sell order using the Quasimodo pattern?

You place a buy or sell order near the right shoulder and place a stop-loss below the maximum pain level.

What are the benefits of using this pattern?

The benefits of using this method are that it provides a high risk-to-reward ratio, confirms the trader’s bias, and helps to identify strong supply and demand zones.