The Quasimodo pattern is an established formation that some price action traders favour
over ‘traditional’ support and resistance methods.
Although the pattern’s origin is unknown, some believe it
draws its name from the fictional character Quasimodo:
the main character of the novel, The Hunchback of Notre Dame, with the
pattern’s shape portraying Quasimodo’s physique. You may have also acknowledged
other traders refer to this structure as an ‘over and under’ pattern.
Regardless of the structure’s name, its configuration represents a fakeout that
can be traded upon returning to its left shoulder.
What is the Quasimodo Pattern?
The Quasimodo pattern is a reversal structure used by price
action traders across all markets and timeframes. It helps locate potential trend reversals and is widely employed
in trending environments to ‘buy dips’ in uptrends and ‘sell rallies’ in
downtrends.
For a valid Quasimodo
pattern, you must ensure that the market traded is either in an uptrend or
downtrend. This does not have to be a meaningful trend; it could simply
be a noticeable up or down move.
The image below
demonstrates the bearish Quasimodo and bullish Quasimodo formations; the focus
here will be on the bearish Quasimodo formation (though the bullish Quasimodo
pattern is essentially the same, only in reverse).
Leg 1 represents a bullish wave in an uptrend. There
is no indication that a bearish Quasimodo pattern will form; this is simply a
leg higher in the trend or up move. This is followed by a dip lower (leg 2).
Similar to leg 1, there is no suggestion that a bearish Quasimodo pattern will
form at this point; the dip will likely be viewed as a correction in the trend
and may be bought into at support.
The push higher (leg 3) will be viewed as a
continuation of the uptrend. However, once leg 4 forms a low, this is a warning
signal that upside momentum may be losing steam. Leg 5 pencils in a pullback
and brings us to the Quasimodo left shoulder, which is always drawn from the
apex of legs 1 and 2 and extended through price to join leg 5 – namely the
pullback.
Only once we see a price test of the
Quasimodo’s left shoulder do we know we have possible resistance and could see
sellers step in from here.
Are Quasimodo Patterns
the Same as Head and Shoulder Patterns?
Do not confuse the
Quasimodo pattern with the head and shoulders pattern. A
valid head and shoulders top requires three defined peaks, as shown above: the
left shoulder, the head, and the right shoulder, which is something a Quasimodo
does not need to form a valid pattern. All the bearish Quasimodo requires is a
left shoulder, a head, a lower low, and a subsequent pullback to the Quasimodo
left shoulder level.
The neckline of a head and shoulders top is
generally best positioned horizontally or in an ascending position (as above).
This is because the entry point of a head and shoulders top is caused by a
break of the neckline (the protective stop-loss order tends to be positioned
above the right shoulder). A downward-sloping neckline, as what you would get
with a bearish Quasimodo, would place the trader at a somewhat disadvantage in
terms of entry and stop placement.
But in any case, Quasimodo sellers would
already be in a short position (sell) before the break of the head and
shoulders top neckline. Traders selling the Quasimodo formation would generally
position their protective stop-loss orders above the pattern’s high (leg 3). As
for profit objectives, each trader will be different. Some target opposing
resistance or support levels, while others trail their position using moving
averages. This is something the trader will have to decide in testing. Before
moving to a live trading account, a thorough backtest of the Quasimodo
formation is recommended.
‘The Trend Is Your
Friend’
Although the Quasimodo
pattern is used as a trend reversal pattern, it is also frequently used to spot
entries into an existing trend.
First and foremost,
Figure 1 exhibits an example of a bearish Quasimodo formation on the H1
timeframe of the EUR/USD currency pair (euro versus the US dollar) that
helps pinpoint a short-term trend reversal. This pattern clearly shows that the
uptrend has deteriorated to a point where selling could be an option.
Figure 1 – Chart
Created by TradingVIew.
However, as noted, many
traders use the Quasimodo pattern to help pinpoint an entry into an existing
trend. Attempting to pick the tops and bottoms of a trend with a Quasimodo
formation can be difficult.
How one identifies a
trending market will be trader-dependent; some prefer to use textbook price
swings (e.g. higher highs and higher lows for an uptrend and lower lows and
lower highs for a downtrend), while others opt for technical indicators, like the Average Directional Index (ADX) or moving
averages.
As you can see in
Figure 2, the daily timeframe of the EUR/USD, an uptrend began in October 2022,
shown by way of a higher high and a higher low. In early 2023, Quasimodo
traders got the opportunity to enter long (buy) the EUR against the USD based
on a correction in the uptrend that found support at a Quasimodo pattern.
Despite approximately two weeks of consolidation at the Quasimodo support
level, buyers eventually pushed price action higher to resume the uptrend.
Figure 2 – Chart
Created with TradingView
Ignored Quasimodo
Levels
So far, the article has
highlighted standard ways of trading the Quasimodo pattern. However, ignored
Quasimodo levels can also form part of advanced trading strategies.
As its name implies, an
ignored Quasimodo level is a Quasimodo pattern in which price surpasses the
Quasimodo support or resistance and engulfs the head of the formation (thus
negating its use). Assuming the break of the Quasimodo level was swift and
‘clean’ (there was no immediate retest before pushing beyond the head), a
retest of the level is often seen and can offer a high-probability way of
trading using the Quasimodo pattern. These tend to be placed in line with the
trend of the market
traded.
As per Figure 3, the
EUR/USD currency pair formed an H1 Quasimodo support pattern in early January
2024. Mid-January, nevertheless, saw price run through the level, ignoring it
and engulfing the head of the pattern shortly after. On 18 January, price
action retested the underside of the breached level in line with the current
downtrend, providing traders with a key level of resistance to trade.
Figure 3 – Chart
Created with TradingView
Combining the Quasimodo Pattern
with Other Factors
Like all technical
approaches, it is generally best to trade based on as much evidence as
possible.
This means potentially
combining the Quasimodo pattern with trend direction, as shown in Figures 2 and
3. Advanced trading strategies also include additional support and resistance
from multiple timeframes, particularly higher timeframes, as well as Fibonacci studies, technical indicators, and fundamental analysis.
Quasimodo FAQs
1.
What
is a Quasimodo pattern?
The Quasimodo pattern represents a reversal pattern used
among price action traders across all markets and timeframes. It is used to
help identify trend reversals and to enter existing trends. If ignored,
Quasimodo patterns can also be traded.
2.
Does
a Quasimodo trading pattern guarantee a reaction?
No. There are no
guarantees in trading
or investing. A Quasimodo pattern may put the odds in your
favour and can provide a positive return over a sample of trades.
3.
Can
a Quasimodo pattern be used in isolation?
While some traders undoubtedly claim to trade the financial markets
successfully using only the Quasimodo pattern, most traders combine Quasimodo
patterns with additional tools.
This article was written by FL Contributors at www.forexlive.com.
