Are you familiar with harmonic patterns? How about the three drives pattern? In this article, we’ll teach you how to identify, interpret, and trade this powerful technical indicator.
What Is The Three Drives Pattern?
The three drives chart pattern is a formation of three consecutive symmetrical price movements. It is classified as a harmonic reversal pattern and comes in two forms: bullish and bearish.
Currency traders use the three drives to identify potential reversal zones in the live forex market. Upon doing so, it becomes possible to enter the market to the long (buy) or short (sell).
How To Identify And Use The Three Drives Reversal Pattern In Forex Trading
Like other harmonic patterns, identifying and constructing the three drives pattern is a multi-step process. Nonetheless, it’s a powerful reversal indicator and one that can improve your profitability when trading forex. The GBP/USD chart below gives us a clear illustration of the 3 drives pattern.
Below is a breakdown of the process used to identify and trade this harmonic pattern:
- Identify the prevailing bullish or bearish trend.
- Label the three consecutive directional price movements as 1, 2, and 3.
- Confirm the pattern by using Fibonacci extensions or retracements. This is done in the same fashion as the ABCD pattern only with an added leg. The difference is that a three drives pattern is made of 5 legs, while an ABCD pattern has only 4.
- Upon the third and final drive being completed, establish a market entry. This will exist as either a bullish or bearish reversal.
Previously Formed Swing Point
One of the critical parts of constructing a valid three drives is identifying a previously formed swing point. A swing point is where price pivots from the existing trend.
Swing points are vital elements of the three drives pattern. They serve as the price point from which Fibonacci extensions and retracements are applied. Below is an illustration of a swing point.
Fibonacci Extensions & Retracements
When identifying the three drives pattern, symmetry of price action is important. To establish this symmetry, Fibonacci extensions or retracements may be used. The following are how each may be applied to build the three drives formation:
- Fibonacci Extension: The last two drives, C-D and E-F, should represent 127.2% and 161.8% of the B-C and D-E pullbacks.
- Fibonacci Retracement: The B-C and D-E pullbacks represent 61.8% or 78.6% retracements of the preceding drive.
How To Trade The Three Drives Formation?
All classical, harmonic, and single-candlestick patterns have a specific procedure for being traded. It is a three-pronged approach that includes determining market entry, setting a stop loss, and locating a profit target.
1. Market Entry
The three drives formation is a reversal indicator that occurs in both uptrends and downtrends. Thus, the pattern may act as either a bullish reversal (buy) or a bearish reversal (sell) signal.
Market entry for the three drives occurs after the third drive. The bullish three drives pattern is a buy above the third drive; for the bearish, it’s a sell beneath the third drive.
Locating a stop loss with harmonic chart patterns relies on building out the proper legs of the formation. For instance, in the case of the bearish three drives, the progression is an upward move and then a lower retracement. So, the stop loss is located above the formation.
In the case of a bullish three drives pattern, the stop loss is placed beneath the lower extreme established by the third drive.
3. Profit Targets
Forex traders use a collection of techniques to set their profit targets. A few of the most common are risk vs. reward ratios, pattern height, or Fibonacci extensions.
With the three drives formation, it’s up to you where you place your profit targets. Factors to consider include market volatility, strategy, and the time frame being traded.
The GBP/USD chart below provides a clear look at how to determine the precise entry point, set stop losses, and align profit targets.
Here’s how the GBP/USD trade above was executed:
- A pronounced downtrend was observed on a 1-minute GBP/USD chart.
- The three drive pattern was constructed.
- A buy order at 1.3178 was executed.
- Stop-loss was placed beneath the pattern at 1.3175.
- A profit target was located at 1.3189 at the pattern’s 62% retracement.
- An 11-pip gain was realized upon price reaching the profit target.
Three Drives Harmonic Patterns – Pros and Cons
Every strategy, system, or analytical base has a set of pros and cons. Below are a few of the most relevant for the three drives chart pattern.
- User-friendly and easy to recognize
- Can generate large profits when effective
- Offers the trader a concrete stop out point
- It doesn’t frequently occur in all forex pairs
- It is expensive to trade on more extensive duration price charts
- Loses efficacy on compressed time frames
Everything About the Three Drives Pattern in One Video
Check this video for more information on how to trade the 3 drives pattern.
Below, we have summarized the main findings of three drives harmonic patterns:
- The three drives formation is a harmonic chart pattern. It consists of three consecutive moves in price, which each follow a measured retracement.
- Three drives patterns are leading reversal indicators. They furnish traders with counter-trend buy and sell signals. The bullish three drives occur during a downtrend; a bearish three drives develop during an uptrend.
- Fibonacci retracements and extensions are used to confirm the pattern’s symmetrical price movements.