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The Quasimodo Pattern

Support and resistance, or market structure, is typically the foundation of most well-rounded trading strategies. Without this knowledge, navigating the markets is a challenge for just about any technical trader!

Regardless of the vast array of methods highlighting tradable support and resistance levels, one approach stands superior: the Quasimodo pattern.

 

 

Enter the Quasimodo!

The Quasimodo pattern (‘QM’ for short) is really a very simple configuration, and is easily understood once one grasps the psychological dynamics involved.

As is seen from the diagram above, the pattern requires five legs to complete.

The idea is to extend a line into future price from the left shoulder (see red and green lines) and to then execute trades from this base. This is the support and resistance.

Here’s a look at a bearish QM on a live H1 chart:

The psychology

This is where it gets interesting!

Knowing how to draw the pattern is one thing, understanding what’s going on behind the scenes is another.

So, going forward, we are going to use a bearish formation in an attempt to explain the moving parts behind a QM. Don’t worry, though. It’s exactly the same principles for a bullish pattern, only with the orders reversed.

  • Point 1 illustrates that the market is hopeful, visibly chalking up higher highs and higher lows. This type of action attracts breakout traders, trend traders and also contrarian traders. Breakout traders look to buy the break of previous highs, trend traders aim to time/buy the dips (placing stops beneath lower lows) and contrarians attempt to fade this action from areas of resistance. Remember guys, the appearance of a trend will look different dependent on what timeframe you look at. An M5 chart may show a nice-looking up move, while on the H4 chart this is likely to be nothing more than a blip within a potentially down trending market. It’s all fractal.
  • It will only be at point 2 where the market fails to sustain gains and breaks lower do we know that we have a QM setup. This movement places the traders that bought the break of the previous high at point 3 (which is our left shoulder in this example) into pain as they’re now experiencing heavy drawdown, with most likely liquidating their positions. Additionally, the push lower also triggers stop-loss orders from the trend traders that positioned stops below the lower low (see thick red line). As you can imagine, this exacerbates selling pressure since these stops for both breakout and trend traders are in fact sell orders once filled.
  • Once a firm break to the downside has taken place, and both trend and breakout traders are out of the fray, we can then proceed to pencil in our left shoulder at point 3 (the red dotted line).So, why do these left shoulders sometimes hold price? To our way of seeing things it is largely to do with order flow, as we hope is demonstrated on the diagram below:

  • Once the left shoulder is in place, there’s not much more one can do since price could simply consolidate, or even continue to press lower, before challenging the QM left shoulder.

Looking forward…

Hopefully, you now have some idea on how the QM pattern functions. And with this new-found knowledge you’ll likely begin noticing it form on the charts a lot more!

Basing trades solely on this one metric, however, is not likely to bring home stellar returns. On the other hand, trading this pattern in alignment with additional tools,  could prove to be an awesome base to initiate trades from.

In part two we’ll be diving a lot deeper into this pattern and looking at how to use this configuration to execute high-probability trades each time one interacts with the market.

 

 Quasimodo Pattern part 2 

 

 

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