Understanding The Three Drives Pattern

One can plan trades with greater visibility if one can anticipate when the current trend will lose steam. The three drives is one of the reversal patterns of the family of harmonic pattern that can predict trend reversal more accurately. Analysts link a series higher highs and lower bottoms that occur between 127-161.8 percent of Fibonacci's ratio to form the three drives pattern. The pattern can trigger buying or selling signals, and it can be found in both bullish and bearish trend areas.

The three drives pattern was first recognized by Robert Prechter. It is less common than other harmonic patterns and is therefore rare. It is therefore a strong reversal pattern that appears when it does.

What are three drives patterns?

The three drives pattern can be either bullish, or bearish. It is a reversal type when it fails. The three drives pattern signals a strong continuation to the current trend. It is powerful enough to aid traders in trade setup.

The three drives pattern, which traders recognize as one of many harmonic patterns in Scott Carney’s book is the most well-known. Drives are the three legs of this formation. The name is derived from this. This exhaustion pattern indicates that the trend is waning.

The main difference between Elliot Wave theory, harmonic patterns, and the Elliot Wave theory is the Fibonacci ratio. Harmonic patterns are more precise in predicting changes of momentum because they follow the Fibonacci extractions.

How to Identify Three Drives Patterns In A Chart

The three drives pattern is easily identifiable due to its unique characteristics. The bullish pattern has three swing highs and the bearish one three swing lows. After the third swing, a reversal occurs.

Three consecutive drives are a bullish three-drive pattern. The price drops to a new low, then retraces for a time and falls again to create the second lowest. The second drive occurs at either 127 percent or 161.8% Fibonacci extraction from the first drive prior to making the third drive. Usually, it is at 127 percent or 161.8% of the second drive.

After several fallthroughs in succession, the third drive is the best entry point for traders looking to take high-reward trades.

The bearish three-drives pattern, which is a mirror image to the bullish one, gives strong signals for shorting.

Reversals occur at the end of strong price rallies or falls. Fibonacci extension tools or Fibonacci Retracement are used by traders to measure each drive. This allows them to determine corrective pullbacks as well as external impulsive leg within the structure.

These are the most important Fibonacci ratios.

- The corrective drive that occurs after the first leg forms at 61.8% retracement (measured by the Fibonacci trace tool).

- The second corrective drive takes place at 61.8 percent Fibonacci Retracement. This is calculated using the high points and low points from the second drive

- The second drive also extends the corrective wave by 127 percent

The third drive is a 127 per cent extension of the corrective action before it

The Fibonacci ratio must be adhered to by all three drives. When all three legs agree on Fibonacci ratios traders can take a position on the market.

Three Drives Pattern

The three drives pattern is like any other trading pattern. It works well with other trading tools. After identifying the three drives pattern, traders combine their study with RSI (relative strength index). A bullish three-drives pattern that has a RSI of 70 or more indicates an overbought market. In contrast, a RSI of 30 or less during a downtrend indicates that the market is oversold.

Once the RSI value has been confirmed, traders plan to enter at a Fibonacci extension of 127 percent and stop-loss at 161 per cent. The traders would profit at various stages, including the beginning of the third drive, second, and the end of the second drive. These rules can be used to set up trades in bullish or bearish three-drive patterns.

The Bottom Line

Although three drives patterns are part of the group harmonic patterns, they are very rare. Three drives patterns adhere strictly to the Fibonacci ratio. It is important to confirm the formation. This trading tool offers strong trading opportunities, and the right risk-reward ratio when compared to other technical trading tools. The best trading opportunities are usually found in a three-drives pattern that occurs after a strong trend.