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The Three-Drive pattern is a Harmonic pattern that defines a potential reversal. The pattern was first mentioned in Robert Prechter’s book, “Elliot Wave Principle.” Later, Scott Carney modifies Three-Drive with Fibonacci ratios.
What is the Three-Drive pattern?
The structure of the Three-Drive differs from other patterns. It has only three legs rather than four legs, which is a commonality in Harmonic patterns.
The pattern develops between three points (A, B, and C) and drives 1,2, and 3. The price moves between these drives forming highs and lows, defining a consolidation phase. Scott Carney described it as a 5-wave structure.
This is what the pattern looks like:
Each part of the pattern is linked with Fibonacci ratios. These ratios mark large retracements and projections.
Traders need to follow a few rules to identify Three-Drive on a chart. They are:
- Point A should retrace the first drive at 61.8%.
- Point B should retrace the second drive at 61.8%.
- The second drive should extend point A at 1.272.
- The third drive should extend point B at 1.272.
- The time of the price should be equal between the second and the third drive.
- Point A and B should retrace at an equal time.
The third drive represents the completion of the pattern, and this is where traders take their positions.
Traders often confuse Three-Drive with the ABCD pattern. However, the ABCD pattern has four legs instead of three. Also, the Fib levels of both patterns are different.
How to use the Three-Drive pattern?
Traders apply Three-Drive’s bullish and bearish version for taking their positions.
a. Bullish Three-Drive
The bullish Three-Drive occurs in a downtrend and presents a reversal at the third drive. Traders take long positions at the third drive, and stop-loss is set below the third drive.
b. Bearish Three-Drive
The bearish Three-Drive appears in an uptrend and signals a trend reversal. Traders take short positions at the third drive, with stop-loss placed above the third drive.
An aggressive trader may take his/her positions at point B. However, one should be careful about this. This is because the Three-Drive can sometimes produce false signals. In this case, instead of a reversal, the price would move in a similar direction.
For example, a trader thinks he/she has spotted a bullish Three-Drive but rather a reversal, the price moves with the trend.
But for every problem, there is a solution. To filter Three-Drive’s false signals, traders can apply other technical indicators to find the trend’s direction. An indicator one could choose to use along the Three-Drive pattern is the Zig-Zag Indicator. This indicator can help the trader to spot market highs and lows.
A keynote to remember is the Three-Drive can be more suitable to some trading strategies on trending markets rather than on ranging markets. If there is a slight hint of ranging markets, traders may wish to wait. But again, it depends on the individual trader.
Three-Drive trading strategy
The Three-Drive can surface on any timeframe. Therefore, traders can take full advantage of it. However, some traders believe that the higher the timeframe, the more reliable the Three-Drive pattern would be. This may not be the case depending on the complete forex strategy being used.
Three-Drive buy strategy
- Locate the pattern in a downtrend.
- Wait for the price bar to go bullish before entering.
- Enter the trade on the third drive.
- Place a stop-loss near the recent low from the third drive.
- Exit the trade before the price drops.
Three-Drive sell strategy
- Look for the pattern in an uptrend.
- Wait for the price bar to go bearish before entering.
- Enter the trade on the third drive.
- Place stop-loss above the recent high form the third drive.
- Exit the trade before the price rises.
Three-Drive pattern conclusion
The Three-Drive Pattern is a a helpful indicator of a trend reversal that can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.
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