{"id":14175,"date":"2017-12-19T14:58:09","date_gmt":"2017-12-19T22:58:09","guid":{"rendered":"https:\/\/www.tradingheroes.com\/?p=14175"},"modified":"2024-03-19T14:51:54","modified_gmt":"2024-03-19T21:51:54","slug":"three-drives-pattern-explained","status":"publish","type":"post","link":"https:\/\/www.tradingheroes.com\/three-drives-pattern-explained\/","title":{"rendered":"Three Drives Pattern Explained"},"content":{"rendered":"

\"Three<\/p>\n

When you buy something through one of the links on our site, we may earn an affiliate commission.<\/div><\/p>\n

The Three Drives Pattern<\/strong> is a well-known harmonic chart pattern. It is a relative of the ABCD pattern<\/strong>, for reasons you will learn about in a bit.<\/p>\n

This pattern was mentioned in Robert Prechter's famous book “Elliot Wave Principle<\/a>.”<\/p>\n

In this post, I will explain how to identify it and show you how it is traded.<\/p>\n

If you want to learn how this pattern works, this post will give you everything you need to know.<\/p>\n

But that's not all…<\/p>\n

I will also show you how to backtest the pattern so you can find out if it is really something that you want to pursue in your live trading.\u00a0<\/strong><\/p>\n

Here we go…<\/p>\n

How to Identify the Three-Drive<\/h2>\n

The pattern consists of a series of three higher highs or lower lows, which signals a potential reversal.<\/p>\n

Sometimes the reversal can be a huge move because the built-up pressure is finally released.<\/p>\n

Not always of course, but that is what happens when it works well.<\/p>\n

Are there time and distance requirements for the moves? Some books say yes, others say no.<\/p>\n

So I'm going to take the most basic explanation that I think all Three Drives traders can agree on.<\/p>\n

Let's take a look at how it works…<\/p>\n

Bullish Three Drives<\/h3>\n

\"Bullish<\/p>\n

In the bullish version of this pattern, there are three drives or pushes in the upward direction.<\/p>\n

After each push, there is a retracement, marked A and B.\u00a0The retracements are a 0.618 Fibonacci retracement of the previous drive.<\/p>\n

The next drive needs to end near the 1.272 Fibonacci extension for the price action to qualify for the for the pattern.<\/p>\n

When price gets close to the drive 3 point at the 1.272 extension, you would put in an order to sell.<\/p>\n

Your target would be the 0.618 retracement of the entire move from point zero to the top of drive 3.\u00a0<\/strong><\/p>\n

At least that is how the textbooks teach it. So that is where you should start testing it.<\/p>\n

Let's take a look at a real example, so you can get a better idea of how this works.<\/p>\n

This is the GBPUSD 4 hour chart on May 16, 2016, on TradingView<\/a> and Oanda data.<\/p>\n

For those of you who want to follow along at home.<\/p>\n

Here's what the chart looks like when we mark point zero.<\/p>\n

\"Chart<\/p>\n

The first retracement hits the 0.618 Fibo level almost exactly.<\/p>\n

\"Chart<\/p>\n

Now if you Fibo the retracement, you will see that price extended way<\/em> beyond the 1.272 extension. So if you were following the rules of the Three Drives Pattern exactly, this would no longer be a valid signal.<\/p>\n

\"Chart<\/p>\n

However, just for fun, let's keep going…<\/p>\n

The next retracement also blows through the 0.618 retracement level.<\/p>\n

\"Chart<\/p>\n

The next push hits the 1.272 Fibonacci extension exactly.<\/p>\n

\"Chart<\/p>\n

Then when we look for a profit target, the 0.618 Fibo retracement of the entire move.\u00a0 In this example, that gets hit easily.<\/p>\n

\"Chart<\/p>\n

So in summary, this was not a textbook pattern, but it would have ultimately worked out. That brings up the question:<\/p>\n

Should I follow the system exactly or should I allow the rules to be bent?<\/p><\/blockquote>\n

Well, that all depends on what your backtesting tells you.\u00a0<\/strong><\/p>\n

Bearish Three Drives<\/h3>\n

Then of course, the bearish pattern is the same thing, but upside down.<\/p>\n

\"Bearish<\/p>\n

How to Trade this Harmonic Forex Pattern<\/h2>\n

Just like with any other trading strategy, different traders will trade this pattern in different ways. But let's take a look at the most commonly taught way to trade this setup.<\/p>\n

It is a good starting point for you to do your own testing and optimization.<\/em><\/p>\n

There are basically three ways that you could enter a trade:<\/p>\n

    \n
  1. Put in a pending order at the last 1.272 level, with a stop loss guess<\/li>\n
  2. Wait for the market to print a strong rejection bar, like a Pin Bar or Outside Bar, then enter the trade, with a stop loss<\/a> on the other side of the bar<\/li>\n
  3. Wait for the market to break through the 1.272 level, then put in a pending order if the market drops below the 1.272 level and use the previous swing high\/low as the stop loss<\/li>\n<\/ol>\n

    Most resources will tell you to wait for the level to be rejected, then put in a trade (#2). So let's go with that method for now.\u00a0<\/strong><\/p>\n

    Potential Optimizations<\/h3>\n

    When you are testing, one way that you could potentially optimize your entry, is to look for divergence of some sort. RSI<\/a> can be a good indicator to use.<\/p>\n

    \"RSI<\/p>\n

    As you can see from the example above, drives 2 and 3 form higher highs on the chart, but RSI forms a lower high on drive 3.<\/p>\n

    Another potential optimization is to look to see if the top of drive 3 matches up with a previous major support or resistance point. In the same example, the turning point does indeed match up with a resistance level.\u00a0\u00a0\"Resistance<\/p>\n

    How to Backtest the Three Drives Pattern<\/h2>\n

    Alright, now let's get down to business.<\/em><\/p>\n

    After most traders read about a trading strategy, they go directly into trading it in their live account.<\/p>\n

    …and big surprise, they lose money and they say that it doesn't work. There are so many things that can go wrong in between the time you learn a trading method and actually trading it with real money.<\/strong><\/p>\n

    Here's a short list:<\/p>\n