Learn Quasimodo Pattern (QM) Strategy – Step by Step Guide

The Quasimodo pattern, also sometimes referred to as the Over and Under pattern, is a technical analysis tool used by traders to identify potential reversals in the market. While it shares some similarities with the more well-known Head and Shoulders pattern, the Quasimodo has a distinct, asymmetrical look.

This guide will introduce you to the Quasimodo (QM) pattern, a valuable tool for spotting potential reversals in the forex, crypto, and stock markets. The Quasimodo pattern, with its unique shape, might seem complex at first glance. But worry not, because we’re here to break it down into its key parts, making it easy for you to understand and identify on charts! We’ll break it down step-by-step, so you can understand the concept and eventually become a “QM Master” yourself!

Origin & History

This isn’t the first time Malaysian ingenuity has left its mark on the technical analysis landscape. We’ve seen the rise of the Fibo Musang, a Fibonacci-based strategy that translates to “Musang’s Fibonacci” (Musang being the Malay word for a small ferret-like mammal). Additionally, Oma Aly’s Bollinger Band Moving Average (BBMA) strategy showcases the creativity brewing in Malaysia’s trading scene.

The Quasimodo, named after the iconic hunchback, perfectly embodies this creative spirit. Its distinct, almost rebellious, shape stands out from the crowd, much like the hunchback himself. But don’t be fooled by its unconventional appearance. This pattern, discovered by Malaysian traders, packs a serious punch when it comes to identifying potential reversals in the market.

The exact origin story of the Quasimodo pattern remains shrouded in a bit of mystery, adding to its allure. Perhaps it was a lone Malaysian day trader who first noticed its recurring form and reversal potential. Maybe it was a shared observation amongst a community of passionate technical analysts. Regardless, the ingenuity of Malaysian traders has gifted the world with yet another valuable pattern.

What is the Quasimodo Pattern?

Three peaks (or troughs) and two troughs (or peaks characterized the Quasimodo pattern) depending on whether it appears on an uptrend or downtrend. Here’s a breakdown of its key features:

• Direction: There are two variations of the Quasimodo pattern:
  • Bearish Quasimodo: This pattern occurs at the end of an uptrend and signals a potential reversal to a downtrend. It comprises three peaks, with the middle peak (head) being the highest, and two troughs, with the second trough being the lowest.
  • Bullish Quasimodo (Inverse Quasimodo): This pattern appears at the end of a downtrend and suggests a potential reversal to an uptrend. It comprises three troughs, with the middle trough being the lowest, and two peaks, with the second peak being the highest.
• Unlike the Head and Shoulders pattern, the Quasimodo pattern exhibits asymmetry. The peaks (or troughs) are not necessarily of equal height (or depth), and the neckline connecting the troughs (or peaks) can be uneven.

Let’s break it down with a chart example. Imagine the price first moves up (point 1) and then dips to create resistance (point 2). The price then breaks above resistance (point 4) after falling to a lower low point (point 3). This is where we might enter a sell position (point 6), which is usually around the same level as resistance (point 2). Points 4 and 5 are called “Over and Under” because the price moved higher than the previous high (Over) and lower than the previous low (Under).

Identifying the Quasimodo Pattern

Here’s how to identify a Quasimodo pattern on a chart:

1. Establish the Trend: First, identify the prevailing trend using technical indicators or price action analysis.
2. Look for the Head: In an uptrend, locate the middle peak (head) that is higher than both the left and right shoulders. In a downtrend, find the middle trough (head) that is lower than both the surrounding troughs.
3. Identify the Shoulders and Troughs/Peaks: Locate the two troughs (in uptrend) or peaks (in downtrend) on either side of the head. These should be lower (downtrend) or higher (uptrend) than the head, but not equal in height/depth.
4. Neckline Formation: Draw a trendline connecting the troughs (uptrend) or peaks (downtrend) excluding the head. This line represents potential support (uptrend) or resistance (downtrend).

Let’s look at a chart example. The price first moves up (point 1) and then down to create resistance (point 2). Then, it breaks above resistance (point 4) after dipping down to form a low point (point 3). Finally, the price falls again, breaking below point 3 and creating a lower low (point 5). This is where we might enter a sell position (point 6), which is usually around the same level as resistance (point 2). Points 4 and 5 are called “Over and Under” because the price moved higher than the previous high (Over) and lower than the previous low (Under).

The QM pattern works for buy signals too! Just flip the chart upside down. The basic principles of Over, Under, and QML/MPL levels apply for buying as well.

Confirmation Techniques

The Quasimodo pattern provides clues, but confirmation is key. Here are some additional strategies:

1. The Breakout Whisperer: Await a decisive price move above the neckline (uptrend) or below the neckline (downtrend). This signifies a potential shift in power between buyers and sellers.
2. Volume Confirmation: Look for a surge in volume on the breakout from the neckline. This increased activity strengthens the reversal signal.
3. Fibonacci’s Guiding Hand: Utilize Fibonacci retracement levels to pinpoint potential entry points after a neckline breakout. These levels indicate areas where the price might pause before continuing the new trend.
4. Combining Forces: Don’t rely solely on the Quasimodo. Integrate it with other technical indicators like Stochastic Os or Macd for a more robust confirmation but be aware of indicators lagging.

How to Trade it?

Now that you’ve grasped the Quasimodo pattern’s anatomy and confirmation techniques, let’s delve into using it for your trading strategy!

1. From Signal to Strategy:

Don’t trade on emotions! Instead, develop a trading plan outlining your entry, exit, and risk management strategies specifically for the Quasimodo pattern. This plan should consider:

• Confirmation: Define your confirmation criteria (e.g., neckline breakout, volume surge).
• Entry Points: Decide if you’ll enter on the breakout or after a retracement using Fibonacci levels.
• Exit Strategies: Determine your profit targets and stop-loss placement based on risk tolerance.

2. Entry Points Made Easy:

There are two main entry points to consider with the Quasimodo:

• Breakout Entry: Enter the trade immediately after a confirmed breakout above the neckline (uptrend) or below the neckline (downtrend). This offers the potential for catching the early stages of the new trend.
• Retracement Entry: Use Fibonacci retracement levels to identify potential pullbacks after the breakout. This can offer a lower entry point but might involve missing some of the initial move.

3. Exit Strategies Unveiled:

Having a clear exit strategy is crucial for managing risk and locking in profits. Consider these techniques:

• Profit Targets: Set realistic profit targets based on technical indicators or chart patterns.
• Stop-Loss Orders: Place stop-loss orders below the entry price (long positions) or above the entry price (short positions) to limit potential losses.
• Trailing Stop-Loss: Gradually adjust your stop-loss as the price moves in your favor, locking in profits.

4. Backtesting the Quasimodo:

Before risking real capital, test the Quasimodo pattern using historical data (on demo account). This allows you to:

• Evaluate Performance: See how effective the pattern has been in the past under different market conditions.
• Refine Your Strategy: Adjust your entry, exit, and risk management strategies based on backtesting results.

5. Fine-Tuning Your Approach:

The Quasimodo pattern can apply to various markets, but it might require some adjustments. Consider factors like:

• Market Volatility: In highly volatile markets, the Quasimodo might be less reliable because of frequent price swings.
• Timeframe: The pattern can be used on short term and long-term charts, but the confirmation criteria might differ.

6. The Quasimodo for Different Timeframes:

The Quasimodo pattern can be spotted on charts with various timeframes (e.g., daily, hourly). However:

• Short-Term Charts: Expect more frequent Quasimodo formations, but confirmation might be more critical because of higher noise.
• Long-Term Charts: Fewer Quasimodos will appear, but successful breakouts can signal significant trend reversals.

Profit Targets and Stop Loss

Here are three ways to determine your profit target (TP):

1. Target a price that reaches the original QML/MPL for a buy position.
2. Use a risk-reward ratio (e.g., 1:2, 1:3, or higher).
3. Set your TP at the resistance level before the QM pattern formed.

Here’s a little chant to remember before entering a trade: “Wait for fakeout, Wait for Diamond, Look to the Left, Look for MPL and you have an Entry.”

Beyond the Basics: Intermediate QM

We saw that the QML for a larger time frame (like daily or H4 charts) often aligns with the QML for a smaller time frame. This is important for identifying precise entry points. Here’s a breakdown:

• Larger timeframe QML: Resistance level
• Smaller timeframe QML (sometimes called QMM or MPL): May appear on smaller charts within the larger QM pattern

The key is to identify where the QML and MPL converge for a more precise entry.

Strengths & Weaknesses of Quasimodo

like any technical indicator, it has its own set of strengths and weaknesses that traders should know before incorporating it into their trading strategies.

Strengths of the Quasimodo Pattern:

Weaknesses of the Quasimodo Pattern:

The Bottom Line

The Quasimodo pattern, with its unique asymmetry, can be a valuable addition to your technical analysis toolbox. By understanding its structure, confirmation techniques, and trading strategies, you can leverage its potential to identify potential trend reversals and make more informed trading decisions.

Remember, the Quasimodo pattern is just one piece of the puzzle. Here are some additional points to consider:

• Combine Multiple Tools: Use the Quasimodo with other technical indicators and fundamental analysis for a more comprehensive understanding of the market.
• Stay Updated: The market is constantly evolving. Keep learning new trading strategies and refining your approach based on market conditions.
• Patience is Key: Emotions can cloud your judgment. Stick to your trading plan and manage risk effectively.