Quasimodo Trading Strategy – Backtest and Insights

There are many chart patterns price action traders use to analyze and anticipate price movements. Being a new entrant in the chart pattern catalog, the Quasimodo chart pattern may not be one of the most popular, but it could be one of the most reliable. Wondering what the Quasimodo trading strategy is?

The Quasimodo trading strategy is a chart pattern that consists of a series of swing highs and lows that breaks the characteristics of an existing trend, thereby signifying a potential change in the trend direction. So, it is a reversal trading pattern that forms around the end of an existing trend — can be a bullish reversal pattern when it occurs at the end of a downtrend and a bearish reversal pattern when it occurs at the end of an uptrend.

In this post, we take a look at the Quasimodo chart pattern and trading strategy. We end the article with a backtest.

What is the Quasimodo trading strategy?

The Quasimodo trading strategy is a chart pattern that consists of a series of swing highs and lows that breaks the characteristics of an existing trend, thereby signifying a potential change in the trend direction.

As you know, the trend is made up of a series of swing highs and lows — an uptrend consists of higher swing highs and higher swing lows, while a downtrend consists of lower swing lows and higher swing highs. When a lower swing low and a lower swing high appears in an uptrend, the uptrend might be in jeopardy, or a downtrend might even be emerging. Similarly, when a higher swing high and a higher swing low appear in a downtrend, there may be a potential upside reversal underway.

So, the Quasimodo chart pattern is a reversal trading pattern that forms around the end of an existing trend — can be a bullish reversal pattern when it occurs at the end of a downtrend and a bearish reversal pattern when it occurs at the end of an uptrend. Although the pattern might seem complex, it is actually very simple to identify and trade.

As a price formation, the pattern consists of three peaks/troughs and two valleys/peaks, depending on the trend where it forms. In an uptrend, for example, it has three peaks, with the middle peak being the highest and the other two peaks being of the same height. In essence, the third peak is a lower swing high compared to the second (middle) swing high. In addition, the second valley, which comes before the lower high (third peak) is a lower swing low.

Structurally, the Quasimodo chart pattern is similar to the head and shoulders chart pattern, but the second valley is significantly lower than the first valley, giving the neckline a steep downward slant that makes waiting for the breakout of that neckline (the actual signal for the head and shoulders strategy) meaningless. So, it is a type of malformed head and shoulders pattern.

Types of the Quasimodo chart pattern

As with the head and shoulders pattern, there can be two types of the Quasimodo chart pattern, depending on the trend it appears and the type of signal it generates:

• The bearish Quasimodo chart pattern: This is like a deformed variant of the head and shoulders pattern. It is formed at the end of an uptrend and indicates a potential reversal to a downtrend. Like the head and shoulder pattern, it consists of three swing highs, with the middle one being the highest, as well as two swing lows, with the second low being significantly lower than the first. The second swing low being lower than the first low and the third swing high being lower than the second high (a lower swing low and a lower swing high) show that the uptrend is likely over. Shorting at this level presents the best risk/reward ratio with a tight stop loss on a break and close above the middle swing’s resistance level.
• The bullish Quasimodo chart pattern: This appears at the end of a downtrend and indicates a potential reversal to the upside. So, it is like the inverse head and shoulder pattern, consisting of three swing lows, with the middle one being the lowest, and two swing highs, with the second high being significantly higher than the first. The second swing high being higher than the first one and the third swing low being higher than the second low (a higher swing high and a higher swing low) show that the downtrend is likely over. Taking a long position at this level present the best risk/reward ratio with a tight stop loss on a break and close below the middle swing low’s support level.

How the Quasimodo chart pattern works

The Quasimodo chart pattern shows a shift in the characteristics of the price structure of a trend, which may indicate an imbalance between the supply and demand forces and the likelihood of a trend reversal.

Usually, the market structure in an uptrend consists of a series of higher swing highs and higher swing lows, while that of a downtrend consists of lower swing highs and lower swing lows. The Quasimodo pattern shows a break of that structure. A bearish Quasimodo shows the emergence of a lower swing low and a lower swing high, which are characteristic of a bearish trend, in a previously up-trending market. This shows that a reversal to the downside is likely. The opposite happens with a bullish Quasimodo pattern in a downtrend — the emergence of a higher swing high and a higher swing low, which are characteristic of a bullish trend, shows that a bullish reversal is likely.

Difference between the Quasimodo chart pattern and the head and shoulder pattern

The two key differences between the Quasimodo pattern trading and the Head and Shoulder pattern are as follows:

1. The extent of the second swing low relative to the first swing low: In the Head and Shoulder pattern, both swing lows end around the same level, making the neckline support level more or less horizontal. In the Quasimodo pattern (bearish), on the other hand, the second swing low is much lower than the first one, which disfigures the head and shoulder pattern. This also holds true when you compare the inverse head and shoulder pattern with the bullish Quasimodo pattern.
2. The entry techniques: The classical entry method in the head and shoulder pattern is the breakout below the neckline, which signifies a lower low and then completes a bearish formation. But given the already formed lower low in the Quasimodo pattern, the formation of a lower high (at the third swing high) completes a bearish formation, so traders look to enter their short positions at that level — many use reversal candlestick patterns, such as the shooting star or bearish engulfing as the entry trigger at that level. The entry at the level of the third swing high offers a better risk/reward ratio than the breakout entry used in the head and shoulder pattern.

Where does it come from (History)

As we stated before, the Quasimodo price structure is very similar to the head and shoulders pattern. It is, in fact, a type of malformed head and shoulders patterns, which is where it got its name from — the hunchback character Quasimodo.

The second swing low, which extends much lower and gives the supposed neckline a downward slant, depicts a crooked or malformed Head and Shoulder pattern.

The first trader to use the pattern is not officially known but we believe that many traders started using it and found out that it worked.

Quasimodo indicator?

The good thing about the Quasimodo trading strategy is that you don’t have to use complicated indicators and tools to trade it. You just need the trendlines and the Fibonacci retracement tool to trade the chart pattern.

Trendlines can help you delineate the trend, and you use the Fibonacci tool to identify the key retracement levels where the third swing could get to before reversing. Ideally, the third swing is expected to get to the first swing level, but in some cases, it may not get there. And when you attach a Fibonacci retracement tool, you find out that it made a 50-61.8% retracement of the second (middle) swing. The 50-61.8% retracement level usually serves as a support/resistance level.

Example of Quasimodo trading strategy

Here are the criteria for entering a short position following a bearish Quasimodo pattern in an uptrend:

• A visible prevailing uptrend marked by a series of higher highs and lows
• A break in the market structure — a lower swing low followed by a lower swing high that ends around 61.8% Fibonacci level, marking a sort of right shoulder.
• Wait for a sign of downward price reversal, such as the RSI or stochastic coming down from the overbought level, or a bearish reversal candlestick pattern, such as the shooting star or bearish engulfing.
• Place a sell order once the trigger forms
• You may place your protective stop-loss above the last higher high (head).
• Your profit target can be near the first valley of the chart pattern.

The criteria for the Quasimodo buy signals can be summarized as follow:

• A visible prevailing downtrend marked by a series of lower highs and lows
• A break in the market structure — a higher swing high followed by a higher swing low that ends around 61.8% Fibonacci level
• Wait for a sign of an upside price reversal, such as the RSI or stochastic rising from the oversold level, or a bearish reversal candlestick pattern, such as the hammer or bullish engulfing.
• Place a buy order once the trigger forms
• You may place your protective stop-loss below the last lower low (head).
• Your profit target can be near the first high of the chart pattern.

Pros and cons of Quasimodo

The pros of the Quasimodo pattern include:

• It provides early entry
• The profit target is known
• It offers a good reward/risk ratio
• It is easy to identify and trade

The cons include:

• It is traded manually
• The strategy is difficult to code into a trading algorithm

Quasimodo trading strategy backtest

A backtest is coming soon.

FAQ:

How does the Quasimodo pattern indicate a trend reversal?

In an uptrend, the Quasimodo pattern shows a lower swing low and a lower swing high, suggesting a potential shift to a downtrend. In a downtrend, it indicates a higher swing high and a higher swing low, signaling a potential reversal to an uptrend.

How does the Quasimodo pattern differ from the head and shoulders pattern?

The Quasimodo pattern is a type of malformed head and shoulders pattern. The key differences include the extent of the second swing low relative to the first swing low and the entry techniques. The second swing low in Quasimodo is significantly lower than the first, and traders enter short positions at the third swing high, offering a different risk/reward ratio than the head and shoulders pattern.

What tools are needed for trading the Quasimodo pattern?

Traders can use trendlines and the Fibonacci retracement tool to identify key retracement levels. Trendlines help delineate the trend, and Fibonacci retracement levels aid in pinpointing where the third swing might retrace before reversing.