What is the Three Drives Pattern?
The three drives pattern has an arrangement with distinct entry and departure points and is self-sufficient. Three swings of the same length in the same direction make up the reversal pattern. For the purpose of locating possible reversal zones, they correspond to specific Fibonacci ratios. Once recognized, the pattern, which can be both bullish and bearish, can signal powerful market turns.
A reversal pattern made up of numerous higher highs or lower lows is known as the “three drives” pattern. They end at a Fibonacci extension of 127, or 161.8%. It may be a sign that the market has reached its recent limit and that the price chart will soon reverse. When the pattern is bullish, it can be used to identify potential buy opportunities, and when it is bearish, it can be used to identify potential sell chances.
Robert Prechter made the first mention of the three drives pattern. It is less common than other types of harmonic patterns and difficult to find, hence it is not frequently employed in trading. It has a five-wave structure and is composed of symmetrical price movements with related Fibonacci projections.
Bearish Three Drives Pattern
This pattern is established by the initial drive, which is a bullish movement. A smaller retracement should end at the initial surge’s 6.18 to 78.6 percent retracement after the A point. The second leg, which finishes with the 1.27 percent extension of the initial drive, will be drawn higher from this point.
The B point should result from a second downward retracement from this level, which should end with a 61.8 to 78.6 percent retracement of the second drive. We should have our third drive and the level at which traders can look to sell when the third wave reaches its apex, which should be the 1.27 percent extension of the second drive. Finally, we hope to see another upward movement.
Bullish Three Drives Pattern
To give traders their first push, the pattern starts out with a negative swing. The A point is then reached after a retracement higher into the first drive’s 61.8 percent level. From this point on, the price declines once again to provide the second drive, which ought to result in a 1.27 percent extension of the first drive.
The price will again increase from here. It climbs back up to the second drive’s 61.8 percent retracement level, giving us our B-point. A third drive will then give the pattern its final push lower and provide a buying zone, with price trading as low as the 1.27 percent extension of the second drive.
Rules of 3 Drive Pattern
The following guidelines should be followed in order to remove noise from the 3-drive pattern.
- All three waves must advance over nearly the same amount of time. I’m not arguing that you must utilize common sense in order to precisely match the time here. When you back-test three different driving patterns, you will have all the information.
- The price must create waves that are symmetrical. Price patterns need to match.
three drives forex pattern - The Fibonacci levels of 50 to 61.8 must be reached by both retracement waves.
- Waves 2 and 3 must reach the Fibonacci extension level between 127.2 and 161.8.
Psychology of Three Drives Pattern
In psychology, little is more. Like if the price tries to decrease but there is a level above it that many retail traders are watching. For many traders, there is a stop-loss level. Institutions will be motivated to raise the price in order to acquire it. Institutions will make three successive tries to break that level due to the intense selling pressure. Price will plunge after breaking through that level like a falling arrow. This psychological pattern is effective.
How to Identify the Three Drives Pattern?
Different three higher highs or lower lows can be used to identify the three driving harmonic patterns. They assemble in opposition to the current tendency. Using the Fibonacci extension and retracement levels of 61.8 and 127.2 percent, each move lower or higher is measured.
The following guidelines can aid traders in spotting the pattern:
- Drive 1 must be retraced at 61.8% for Correction A.
- Drive 2 must be retraced at 61.8% for Correction B.
- Drive 2 has to be an addition of 1.272 to correction A.
- Drive 3 has to be an addition of 1.272 to adjustment B.
The term “3-drive pattern” may occasionally be used to refer to other Fibonacci levels of retracement or extension, such as a 161.8 percent extension rather than a 127.2 percent extension. The pattern also functions without the use of Fibonacci levels, however, it might be less precise.
Traders should also consider the volume that supports every upward or downward movement. A trend change and surrender after the last drive can be more likely if traffic during drives is larger than during corrections. The three drives pattern psychologically denotes three final tries to force the price higher or lower before capitulation occurs and the trend reverses.
What Does the Three Drives Harmonic Pattern Tell Traders?
Three distinct, sequential, and symmetrical drives to a top or bottom characterize the pattern. It’s crucial to have symmetry in time and cost. It is essential not to manipulate the chart’s pattern in any way. It is preferable to avoid trading it if you don’t see it.
After the third drive is finished, there will probably be a reversal. Conservative traders keep an eye out for additional proof that the price is turning around. The targets that traders set are up to them, but they typically go beyond the most recent retracement.
If the pattern doesn’t appear, this can indicate that the previously dominant trend will continue strongly. The three drives pattern has two possible outcomes: bullish or bearish.
How to Trade When you See the Pattern?
Traders aim to enter the market on the third drive in order to profit from the 3-drive pattern. The best price levels for where to enter the transaction are provided by this. It also offers the best chance of having a successful trade.
The third drive primarily moves on to drive C’s 127.2 percent Fibonacci extension. Some traders choose to set their take-profit levels at drive C’s 161.8%. As long as it offers a reasonable risk-to-reward ratio setup, traders can set the levels to their desire. This is primarily a matter of personal preference.
The pattern can be used by traders in a variety of ways, including:
- Currently awaiting sell or purchase orders should be placed at the previous 127.2 percent level with the stop-loss set a few pip(s) below or above the current swing low or high.
- Check for a rejection of the price near the third drive on the market. This entails keeping an eye out for candlestick patterns, like pin bars or dojis, that indicate price rejection. The lower wicks or long upper can be used to distinguish between these rejection bars. Traders can then place their entry and stop-loss positions at the high and bottom of the bars after the rejection bars have formed.
- Finally, investors can wait for the price to surpass the 127.2 percent mark. When the price drops below this high or low, they may place a pending order. The stops are then dependent on the swing point low or high that was previously formed.
Additional Resources About the Three Drives Pattern
Before continuing to read this lengthy article, you should take a look at these two Udemy courses I’ve chosen for you:
- Harmonic Forex Pattern Trading
It will show you step-by-step how to recognize the most harmonic pattern used in the forex markets using multiple chart examples.
- Harmonic Trading
The Art Of Trading With Low Risk will show you how to place your first harmonic trades, identify probable reversal zones, and provide you with real-world examples so you can fully grasp its use and effectively manage your risk.
