Probabilities play an essential role in your forex trading. Although you cannot predict the future with 100% certainty, you can shift the odds in your favour by using technical analysis and patterns. The Quasimodo trading pattern, or QM pattern, is an excellent example of how you can use technical analysis and price movement to improve your trading strategy.
Let’s start with the definition of Quasimodo.
The Quasimodo pattern is a reversal pattern that you may find at the top or bottom of a trend. Quasimodo, meaning the humpbacked character of the Hunchback of Notre Dame, a musical film, indicates deformation within a trend. The name Quasimodo comes from the Disney character who was deformed and rejected by society.
So, what is QM in forex?
Like the humpbacked Disney character, the QM meaning in forex indicates the Quasimodo trading pattern may appear when the market goes strongly in one direction before getting rejected again. The market then creates a second move in the opposite direction.
Layout and Psychology
You will notice a distinctive layout with the Quasimodo trading pattern. Ideally, the QM formation starts with a strong move in one direction, either upward or downward. The decisive move continues for a while, and then a retracement or temporary reversal occurs.
Afterward, the market reacts to the temporary reversal and creates an opposite movement in the original direction.
QM can either be bullish or bearish. Both of them demonstrate similar characteristics but in opposite directions.
Now, look at how the trading psychologies worked during the QM pattern. It will help you to anticipate the market and make the right move using the QM forex trading strategy.
The first move usually takes place on a high volume, indicating strong buying or selling pressure in the market. The market then starts to reverse and retrace. The rejection of the retracement is on lower volume, which indicates that the original move was more substantial.
The Quasimodo pattern begins when traders overbuy or oversell. Here’s how they would appear:
- Bullish Quasimodo: Let’s assume there are more buyers than sellers in the market. It leads to an overbought situation. However, as buyers gradually start to make a profit, the market will retrace. Soon after, when the buyers dominate again, the market will change direction upward again. You can call this a bullish Quasimodo.
- Bearish Quasimodo: In contrast, overselling may occur when there are more sellers than buyers in the market. However, the decreasing price soon attracts new buyers and causes the market to retrace. After a while, as more sellers start to make profit the market continues in the original downward direction.
So how would you capitalise the Quasimodo pattern in forex?
As a reversal pattern, QM lets you trade both long and short positions. In an overbought market, you can look to enter a short position. Similarly, you can aim for a long position in an oversold market.
A trend reversal occurs during a Quasimodo, meaning you should look for confirmation before entering a trade. Otherwise, you could easily make a costly wrong move.
Fortunately, you can look for a few confirmation signs to identify a QM pattern successfully. You can use three types of Quasimodo confirmation: candlestick confirmation, technical confirmation, and the Quasimodo approach.
Here’s how they work.
As the name suggests, you can use candlesticks to confirm the QM pattern. The candlestick pattern will start with a large candlestick to indicate strong buying or selling pressure.
A large shadow of the first one may indicate a temporary market reversal. You will then notice a smaller second candlestick in the opposite direction of the first one. It indicates a correction of the previous reversal.
Soon after, a third larger candlestick will appear in the original direction of the first one. Check out the FXOpen UK resources to learn details about candlesticks.
You can also use a few technical indicators to confirm the Quasimodo pattern forex. Some popular technical indicators for Quasimodo confirmation are the Relative Strength Index (RSI), the Fibonacci structure, Trend lines, and Trend direction.
- RSI: As a momentum indicator, RSI measures the speed and change of price movements. If the RSI moves below 50 after being above it for a while and then goes above 50, you can tell it is a QM pattern.
- Fibonacci retracement: The common Fibonacci ratios used in trading are 23.6%, 38.2%, and 61.8%. The 61.8% Fibonacci level is essential because it is the “golden ratio” or the “divine proportion.” If the market returns to the 61.8% Fibonacci level after moving above it and then resuming the original movement, that ideally indicates a Quasimodo pattern.
- Trend line: A trend line is a straight line that connects two or more price points. Temporary breaking out of a downward trend and then continuing the downward trend line may indicate a bearish QM. The same goes for the bullish QM in the opposite direction.
You can also use the AB = CD approach configuration to detect and confirm as Quasimodo pattern forex. Figuring a QM pattern through an approach analysis requires you to get familiar with the AB = CD approach formation.
The AB line indicates the initial price move, either upward or downward. The BC is a retracement or pullback phase. CD is the continuation toward the direction of AB. Such trend lines often help you quickly locate a QM pattern.
You can forecast a bearish market from an ascending AB = CD pattern and a bullish market from a descending AB = CD. FXOpen UK has tons of resources to help you learn more about approaches.
So, what is the QM level in forex, and how to place a stop loss request using QM forex trading strategy?
You can place your stop-loss above the high or below the low of the Quasimodo trading pattern. An above-the-high stop loss is helpful if you want to short the market. Alternatively, you can go with a below-the-low placement to long the market.
The stop-loss placement is critical with the Quasimodo pattern. The market can retrace after the pattern forms and invalidate the pattern. You want to ensure that your stop-loss is placed in a location that gives the market enough room to correct.
* FXOpen International, best ECN broker of 2021, according to the IAFT