What is Quasimodo (QM) Pattern in RTM Style?

Article Level:
Intermediate

The Quasimodo (QM) pattern is an advanced concept in technical analysis under the RTM (Read the Market) style. It is used to identify trend reversals and market turning points.

This pattern combines shallow breakouts with changes in market structure, often appearing at key areas such as resistance and support levels.

Definition of the Quasimodo (QM) Pattern

The QM Pattern (also known as Over and Under) consists of five steps:

  1. Formation of an initial high or low
  2. Formation of a new low or high (opposite to the first step)
  3. Market creates a Higher High (HH) or Lower Low (LL), surpassing the previous level
  4. Market then moves downward (or upward) to form a new low or high, lower (or higher) than the previous one.
  5. Price returns to the initial level but does not breach it.

This pattern acts as a reversal tool, signaling the end of the current trend and the start of a new one.

QM Pattern in a Downtrend
Formation of the Quasimodo pattern in a downtrend; "H" indicates highs, and "L" indicates lows

Steps to Identify the QM Pattern

To spot this pattern on a chart, consider the following:

  1. Observe the previous trend (uptrend or downtrend)
  2. Examine how the price reaches new levels at key points
  3. Identify the point where price returns but does not surpass the previous breakout, marking a suitable entry point
QM Pattern in an Uptrend
Formation of the Quasimodo pattern in an uptrend; "H" represents highs, and "L" represents lows

How to Trade Using the QM Pattern

To trade based on the QM Pattern, follow these steps:

  1. Determine the Trend: First, identify the main market trend (uptrend or downtrend).
  2. Identify Key Levels: Pay attention to previous highs and lows. The key area is where the price retraces but fails to break through.
  3. Enter a Trade:
    • Sell trades: Enter near the retracement level of the high
    • Buy trades: Enter near the retracement level of the low
  4. Risk Management:
    • Place your stop-loss above the high (for sell trades) or below the low (for buy trades).
    • Set your take-profit targets based on risk-to-reward ratios (commonly 1:3).

Practical Example of the QM Pattern

In the example below, a real case of the QM pattern is illustrated. The market is in an uptrend, and the following steps occur:

  • The price creates a High (H) and then a Low (L)
  • It rises again to form a Higher High (HH)
  • It then falls, creating a Lower Low (LL)
  • Finally, the price retraces to the initial high but does not surpass it

At this point, you can execute a sell trade, setting your stop-loss above the Higher High (HH).

Real Example of the QM Pattern in a Downtrend
Real example of the QM pattern in a downtrend, with details visible in the chart.

In the chart below, the reverse scenario (a transition from a downtrend to an uptrend) is shown:

Real Example of the QM Pattern in an Uptrend
Real example of the Quasimodo pattern in an uptrend; After forming a Higher High (HH), market returns to the QM zone and resumes its upward trend

Key Points for Using the QM Pattern

  • Supply and demand zones are useful for locating this pattern.
  • The distance between highs and lows should not be too large, as this determines the entry and exit zones; A wide distance can disrupt the risk-to-reward balance.
  • This pattern is most effective when combined with other analyses, such as divergences or key levels.

Conclusion

The QM Pattern is a price action-based tool in the RTM style used for identifying trend reversals. It provides traders with opportunities to enter trades with favorable risk-to-reward ratios.

The pattern is rooted in market price behavior, making it applicable across all timeframes and markets.

FAQs

Is the QM Pattern similar to the Head and Shoulders Pattern?

No; although they share some similarities, the Quasimodo pattern requires an additional high or low that surpasses previous levels.

Can the QM Pattern be used in all timeframes?

Yes, this pattern works across all timeframes and appears at key levels such as support and resistance.

How can the risk in QM trades be minimized?

Risk can be minimized by setting precise stop-loss orders and focusing on fresh supply and demand zones.

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