If one can predict when the current trend is losing steam and preparing for a reversal, one can plan a trade with better visibility. The three drives is a reversal pattern of the family of harmonic patterns that predicts trend reversal with higher accuracy. Analysts connect a series of higher highs and lower lows, occurring between 127 and 161.8 percent of the Fibonacci ratio, forming the three drives pattern. Occurring at both bullish and bearish trends, the pattern triggers possible buying and selling signals.
Initially recognised by Robert Prechter, the three drives pattern is rare and occurs less frequently than other harmonic patterns. Hence, it is a strong reversal pattern when it appears.
What is three drives pattern?
Three drives pattern is either bullish or bearish. Since it is a reversal pattern when it fails, the three drives pattern indicates a strong continuation of the current trend. Either way, it is a powerful formation to help traders in trade set up.
The three drives pattern is one of the many harmonic patterns described in Scott Carney’s book, recognised by traders. The three legs of the formation are called drives. Hence, the name. It is an exhaustion pattern, indicates that the trend is waning in the direction of the current movement.
The primary difference between the Elliot Wave theory and harmonic patterns is that the latter attaches to the Fibonacci ratio. Harmonic patterns follow strict Fibonacci extractions and therefore are more accurate in predicting changes in momentum.
How To Identify Three Drives Pattern In A Chart
Because of its distinctive characteristics, the three drives pattern is easy to spot. The bullish pattern forms three consecutive swing highs, and similarly, the bearish pattern records with three consecutive swing lows. A reversal happens after the third swing.
A bullish three-drive pattern has three consecutive drives. The price falls to a new low and then retrace for a period and then falls to create the second low. The second drive happens at 127 or 161.8 percent Fibonacci extraction of the first drive before making the third drive, usually at 127 or 161.8 percent of the second drive.
After a series of consecutive fallthroughs, the third drive offers the most precise entry point for traders to go long with high reward potential.
The bearish three drives pattern is a mirror image of the bullish one and gives strong signals to go short.
The reversal pattern occurs at the end of a strong trend of price rally or decline. Traders measure each drive using Fibonacci retracement or extension tools to measure corrective pullbacks and external impulsive legs within the structure.
Here are the most crucial Fibonacci ratios and guidelines
- The corrective drive occurring after the first leg forms at 61.8 percent retracement, measured by the Fibonacci retracement tool
- The second corrective drive happens at 61.8 percent Fibonacci retracement, calculated using the high and low points of the second drive
- The second drive is also a 127 percent extension of the previous corrective wave
- The third drive is a 127 percent extension of the corrective movement before it
Three drives harmonic pattern requires firm adherence to the Fibonacci ratio. When all three legs confirm Fibonacci ratios, traders take a position in the market.
Trading Three Drives Pattern
Like any other trading pattern, the three drives pattern works best together with other trading tools. Once traders identify the three drives pattern, they combine its study with RSI or relative strength index. An RSI above 70 during the formation of a bullish three drives pattern indicates an overbought situation. Conversely, an RSI study of 30 or less in a downtrend confirms overselling conditions in the market.
After confirming the RSI value, one plans an entry just around 127 percent Fibonacci extension and place a stop-loss at 161 percent level. Traders would take profit at different stages – at the beginning of the third drive and second and finally at the start of the second drive. These are general rules of trading in three drives patterns and applicable in setting up trade in both bullish and bearish three drives patterns.
The Bottom Line
Three drives pattern belongs to the group of harmonic patterns but is relatively rare. A three drives patterns strictly adhere to the Fibonacci ratio, and it is essential to confirm the formation. It offers robust trading opportunities and with the proper risk-reward setting when compared with other technical trading tools. A three drives pattern occurring after a strong trend usually provides the best trading opportunities.