Understanding QM Pattern: A tool for identifying trend reversal points

When it comes to chart patterns in the market, most traders are familiar with Head and Shoulders or triangle patterns. However, there is one pattern that has been overlooked which is effective in indicating trend reversals: the QM Pattern or Quasimodo Pattern, which has recently started gaining attention from the trading community.

QM Pattern: Definition and Characteristics

The Quasimodo Pattern is a price structure that reveals a change in trend direction. It resembles the Head and Shoulders pattern but with a key difference: the right shoulder is unbalanced with the left shoulder. This part of the pattern gives a feeling similar to the protagonist of Notre-Dame de Paris, (Quasimodo), which is the origin of the name.

From a graphical perspective, the QM Pattern consists of three key points similar to Head and Shoulders, but the main difference is that after the head (Head) forms, the subsequent consolidation often breaks through the neckline aggressively before the price retraces to form a weaker right shoulder compared to the left shoulder. This experience leads to a clear trend reversal.

The QM Pattern appears frequently at major trend reversal points, whether transitioning from downtrend to uptrend or vice versa. Like Head and Shoulders, it can be divided into two types.

Bullish QM Pattern: Signal of an Uptrend

This pattern appears at the end of a declining trend that is about to reverse. Traders can observe that:

Starting from a downtrend at the base, the price forms a series of decreasing lows (Lower Low). Trading volume begins to show conflicting signals, lacking enough momentum to push the price further down.

After the head completes, the price rebounds strongly, breaking through the previous resistance and creating a new high (Higher High), but cannot sustain this position for long, and the price retraces.

Then, during this retracement, the price halts its decline and does not break below the previous low of the left shoulder. A Higher Low signal begins to appear.

Until the price tests the support and reverses upward, creating a new Higher High, confirming the uptrend.

Bearish QM Pattern: Warning of a Downtrend

The appearance of this pattern is the opposite of the Bullish QM Pattern:

In the late stage of an uptrend, the price forms a series of increasing highs (Higher High). Trading volume decreases, signaling a warning.

After reaching the peak, the price drops sharply, breaking through the previous support and making a new low (Lower Low), but the selling pressure seems to weaken.

The price then reverses upward but cannot surpass the previous high of the left shoulder, forming a Lower High.

When the price tests the resistance and fails to break through, then reverses downward to make a Lower Low continuously, the downtrend is supported by this pattern.

Strong Theories and Fundamentals

The QM Pattern is not just a coincidental price pattern but is based on Dow Theory (Dow Theory), which is central to trend trading.

According to this fundamental principle, “The trend remains in effect until a clear signal indicates a reversal,” reflected through Higher High in an uptrend and Lower Low in a downtrend all the time.

The QM Pattern truly breaks these turning points:

• In the Bullish QM Pattern: the price creates a Lower Low (Confirms Downtrend), then a Higher High (Breaks Downtrend), followed by a Higher Low confirming the start of an uptrend.
• In the Bearish QM Pattern: the price creates a Higher High (Confirms Uptrend), then a Lower Low (Breaks Uptrend), followed by a Lower High confirming the start of a downtrend.

This mechanism depends on the balance between demand and supply (Demand Supply), which changes significantly during these periods.

Trading Strategy Incorporating Demand Supply Zones

Applying the QM Pattern in actual trading is most effective when combined with the concept of Demand and Supply Zones.

For Bullish QM Pattern:

When the pattern begins to form the right shoulder, the price should create a Higher High first, then retrace. The Demand Zone is the area not lower than the left shoulder. This is a good entry point.

Set a Stop Loss at the lowest point of the head or the previous low.

The exit target is when a clear trend reversal signal appears.

For Bearish QM Pattern:

When the pattern is forming the right shoulder, the price should make a Lower Low first, then bounce back. The Supply Zone is the area not higher than the left shoulder. This is an appropriate short entry point.

Set a Stop Loss at the highest point of the head or the previous high.

Exit the position once the downtrend is confirmed.

Limitations and Cautions

Although the QM Pattern is effective, there are important limitations:

The main limitation is applying it to assets with low trading volume. In such cases, the pattern that appears may resemble a QM Pattern but could be controlled by a small number of players, resulting in price behavior that does not align with fundamental theory.

Trading volume is a crucial factor; ensure that volume is sufficient to validate the pattern.

Reproductions of the QM Pattern can occur, especially on smaller timeframes, so giving more weight to larger timeframes often yields better results.

Summary

QM Pattern is a valuable analytical tool for trend-following traders. Its name resembles the hunchback character with an unusual shape. The pattern itself is unbalanced but can reveal critical trend reversal points.

Supported by Dow Theory and supply-demand principles, it offers high accuracy in indicating trend reversals. When combined with Demand and Supply Zones, trading based on this pattern can be highly promising.

However, checking the trading volume of the asset before applying is essential to ensure that the pattern is genuine and can generate significant profit opportunities.