How to Trade with the Quasimodo Trading Strategy?

One fascinating fact about crypto trading is that many strategies can be used to make profits. It is like having a destination with multiple routes, some faster, some slower, some riskier, and others less risky. In trading, profit-making is the single destination all traders wish to arrive at.

Interestingly, there are many ways or “routes” to get to this destination. While many traders are familiar with patterns and strategies like the head and shoulders and the double and triple top and bottom, there is one effective trading strategy that is far from common. That strategy is the Quasimodo trading strategy. If you want to learn this strategy and how to use it to make profits from the crypto market, follow through.

What is the Quasimodo Trading Strategy?

The Quasimodo trading strategy is a pattern that consists of a series of swing lows and swing highs and is usually used to spot trend reversals. The pattern looks similar to the head and shoulders pattern and the inverse head and shoulders too. The name Quasimodo was coined from a Cartoon character with a hunchback. The image below shows the cartoon character bearing a similar shape to this trading pattern.

Earlier on, the Quasimodo strategy was used to spot trend reversals only. In recent times, though, more variants of this trading strategy have been discovered. These variants can be used for continuation entries too. The Quasimodo strategy can be subdivided into the Quasimodo Reversal Pattern (QMR) and the Quasimodo Continuation (QMC).

The Quasimodo Reversal Pattern

The Quasimodo reversal pattern occurs at the end of a lengthy trend. It could be bullish or bearish. The bearish reversal pattern is formed after a cryptocurrency’s bull run or price rally. Higher highs and higher lows usually accompany price rallies.

When the buyers lose momentum, and one final higher high is accompanied by a higher low, another higher high is formed. However, this time, the higher high is followed by a lower low rather than a higher low. The appearance of the lower low signifies that buyers may be losing the price battle at this point.

After the lower low, a lower high is formed. The price level of the new lower high formed is usually around the same price level as the first higher high but lower than the second higher high. The image below brings the description to life. Notice the failure of the price to keep making higher highs and higher lows.

Image Source: TradingView

For a bullish reversal, the formation is the direct opposite of the bearish reversal pattern. It is formed after a long downtrend, and the Quasimodo structure can be spotted at the bottom of the trend.

How to Trade the Quasimodo Reversal Pattern

The Quasimodo reversal pattern could be spotted in any time frame. After spotting the pattern, traders can confirm their entries with reversal signs on another timeframe. Reversal signals could be the engulfing candlestick or morning and evening star candlesticks.

To trade the QMR pattern, you must identify your entry, set your stop-loss (SL), and take-profit (TP). The image below shows the entry point, the recommended stop-loss, and the take-profit for the BTC/USDT trade.

Image Source: TradingView

• Stop-Loss: The stop-loss should be placed some distance above the highest high, that is, what looks like the head of the chart.

• Entry: The entry point should be around the region of the first higher-high. The entry point now forms the new lower-high after the price fails to form a higher-high.

• Take-Profit: Traders typically use multiple take-profits. This prevents them from exiting the trade too early or too late. The first take-profit can be set around the higher-high before the price rally. The second take-profit can be set around the higher low at the start of the rally.

The Pros of the Quasimodo Reversal Pattern

• The Quasimodo reversal pattern is effective. The chances of a reversal happening when the pattern is spotted is very high.

• The QMR pattern gives traders a high risk-to-reward ratio. This means more profitable trades and smaller losses for traders.

• The distinct shape of the pattern makes it easy to identify. It can be more easily identified when the chart is changed to a line chart.

• Compared to other chart patterns, the Quasimodo reversal allows early entries. Unlike the head and shoulders pattern, where traders must wait for the neckline break, a trend reversal could be confirmed faster.

The Cons of the Quasimodo Reversal Pattern

• The trading strategy is traded manually and can also be difficult to code into trading algorithms.

• Trend reversals are generally risky. Whales or market movers can capitalize on the trading psychology of retail traders to grab liquidity. When obvious entries like that on the QMR pattern are manipulated, it could lead to losses for retail traders.

The Quasimodo Continuation Pattern

The Quasimodo continuation pattern (QMC) is a QM pattern formed when a trend continues. The Quasimodo shape can also be spotted at continuation points in a trend. This usually occurs just after the reversal. When the market reverses and another Quasimodo pattern is formed, it gives traders a second chance to catch the movement. The shape is exactly like the regular Quasimodo shape, only that it occurs as a continuation.

Image Source: TradingView

The image above shows a Quasimodo continuation pattern formed after the Quasimodo reversal pattern. The QMC pattern creates another opportunity for traders to add to their buy positions.

How to Trade the Quasimodo Continuation Pattern

The QMC pattern is traded like the QMR pattern. For the bullish continuation pattern, the entry is set around the level of the initial lower low or what seems to be the shoulder level of the pattern. The stop-loss is set a little below the last swing low or what seems to be the pattern’s head. The take-profit can be set around the start of the previous downtrend.

Image Source: TradingView

What is a Quasimodo Manipulation?

Notice that one of the cons of the Quasimodo reversal pattern is that the big players could manipulate it. When whales spot areas with potentially high liquidity, that is, buy or sell orders, they could use these price levels to their favor.

A Quasimodo manipulation occurs when the price of the cryptocurrency or financial instrument fails to reverse at the expected entry region. Market movers usually cause this manipulation. Most times, when this happens, the price tends to retrace toward the failed entry. Other times, the price continues its trajectory without retracing. To protect yourself from Quasimodo manipulation, always use a stop-loss.

How To Get Better Entries?

Although the Quasimodo trading pattern can be used without indicators and other trading tools, traders can get even better price entries by adding these trading tools.

• Trendlines: Plotting trendlines that harmonize with the support and resistance levels can be beneficial. When trendlines align with the expected entry point for a buy and sell trade, the chances of acing that trade increase.

• Candlesticks: The bullish engulfing candlestick usually confirms a bullish trend reversal, while a bearish engulfing candlestick confirms a bearish price reversal. When a bullish engulfing candle is spotted around the entry point of a bullish Quasimodo reversal, the chances of success become higher. The same applies when a bearish engulfing candlestick is spotted around a bearish Quasimodo reversal candlestick.

• Relative Strength Index (RSI): The RSI indicator can confirm entries. When the RSI’s slope declines around the peak of a bullish trend, that could indicate that the bullish trend is weakening. The bearish trend is almost over when the slope increases and a bullish Quasimodo is spotted. This could serve as an added confirmation for the trend reversal.

The Difference Between a Quasimodo Reversal and the Head and Shoulders Pattern

The Quasimodo reversal pattern is similar to the head and shoulders pattern. While the psychology behind the formation of both patterns is the same, the entry points and risk-to-reward ratios differ. For the head and shoulders pattern, the left and right shoulders have equal or almost equal lows. However, for the Quasimodo reversal pattern, the low on the right side of the chart is significantly lower than that on the left side of the chart.

Additionally, the entry points for the head and shoulders pattern are usually around the neckline. However, the entry point for shorting the market is around the peak of the lower high.

Conclusion

The Quasimodo reversal pattern is not as famous as other trading patterns or strategies often used by cryptocurrency traders. Despite this, this trading pattern is effective and can be used to spot reversals early enough.

While this trading strategy is mostly adopted in Forex and Synthetic Indices, it can also be used for trading cryptocurrencies. The Quasimodo continuation pattern gives traders a second chance to join the party should earlier entries be missed. Undoubtedly, the benefits of implementing this trading strategy outweigh the downsides.