While traders are looking for trend reversal signals, what is the QM Pattern that has become a tool of interest?

In trend trading, most investors are already familiar with Head and Shoulders. However, when it comes to the QM Pattern (Quasimodo Pattern), many people might be confused about what it is because this type of chart pattern is a relatively recent discovery in the trading industry. Although it is a new tool, the QM Pattern has a remarkable ability to indicate trend reversals, helping traders avoid staying in the same trend and incurring losses.

Understanding the QM Pattern Through a Fascinating Character

The name Quasimodo Pattern is derived from the character with a distinctive shape from the novel “The Hunchback of Notre-Dame.” This term is used because this chart pattern resembles Head and Shoulders (Head and Shoulders), but one side is noticeably unbalanced, making it look a bit awkward.

The basic feature of the QM Pattern consists of three swing points, similar to Head and Shoulders. However, the difference is that after the head forms, the price will attempt to break through the Neckline seriously before reversing, then forming the last shoulder that is higher or lower than the first shoulder. This formation creates a distinctive difference from typical Head and Shoulders patterns.

Two Main Types of Reversal

Bullish QM Pattern when the market prepares to rise from a strong downtrend

The formation of a Bullish QM Pattern begins with a strong downtrend, where the price makes progressively lower lows (Lower Low) initially. Key signals to watch for include divergence or decreasing trading volume.

After reaching the lowest point, the price rebounds sharply, breaking through the previous resistance and creating a new higher high (Higher High) never seen before. This indicates that the downtrend is about to end.

Confirmation of this pattern occurs when the price returns to test the support level below but does not drop back to the previous low of the left shoulder. Instead, it stops at a higher level (Higher Low), signaling that a new uptrend is about to begin.

Bearish QM Pattern when the market prepares for downward pressure

The Bearish QM Pattern is a mirror image, starting from a strong uptrend with continuous higher highs (Higher High) and possibly divergence signals.

After the head forms, the price drops sharply, attempting to break support and create a new lower low (Lower Low).

However, when the price tests the resistance again, it will not reach the previous high of the left shoulder but will stop at a lower level (Lower High), confirming that the downtrend has begun.

The Deep Reason Behind the QM Pattern

The QM Pattern is not just a random price pattern; it operates within the framework of Dow Theory, which is the foundation of trend-following trading.

The key principle of Dow Theory is “The trend persists until a clear signal indicates a reversal.” In an uptrend, prices must make higher highs and higher lows continuously. In a downtrend, they must make lower lows and lower highs.

The QM Pattern illustrates the breakdown of this trend. In the case of a Bullish QM Pattern, the initial low (confirms a downtrend) is broken when the price makes a higher high (breaks the downtrend signal). Then, when it tests the base, it makes a higher low instead of a lower low, indicating a trend reversal.

How to Apply the QM Pattern in Practice

Using the QM Pattern effectively involves combining it with Demand and Supply Zones, which are points where buying or selling pressure accumulates.

When a Bullish QM Pattern is forming the right shoulder, the price will make a new high before falling back. The area where the price returns to test the support level within the left shoulder is a Demand Zone, ideal for entry. Stop-loss orders can be placed at the lowest point previously made or slightly above the small peak. As the price moves upward, traders should let the trend develop and take profits accordingly.

For the Bearish QM Pattern, the same principle applies but in reverse. Enter short positions at Supply Zones located at the level of the left shoulder when the price drops back.

Cautions Traders Should Keep in Mind

However, the QM Pattern has limitations. Using this pattern on assets with low trading volume may produce similar-looking patterns that are actually just movements of a few players. Therefore, monitoring trading volume is crucial.

Additionally, waiting for the pattern to be fully confirmed before entering a trade remains the best practice.

Summary

The QM Pattern is a fairly accurate tool for indicating trend reversals, based on Dow Theory and the laws of supply and demand. Although its name comes from a character in a classic novel, it is a chart pattern with potential to generate income when used correctly.

The important point is that not every pattern resembling a QM Pattern is truly one. Confirmation through volume, divergence, and entry into Demand and Supply Zones with strong activity are critical decision factors for successful trading.