Three Drives Pattern Trading (Updated)

Three Drives Pattern Trading (Updated)

Three drives pattern featured

It’s not common, but if you spot a three drives pattern, you’ve got a golden trading opportunity.

If you searched google for the three drives pattern, probably you noticed that most guides are trivial. They provide little coverage of this formation. And little in-depth information on its different versions, also how to spot it and trade it.

In fact, in my experience, the three-drive is one of the reliable patterns. That’s why in this tutorial, you will learn everything you need about the 3-drive (including, the best way to trade it).

let’s get started.

What is the Three Drives Pattern

The Three Drives Pattern is a reversal chart formation that consists of 5 waves. Three main waves and two corrective waves. At the end of the pattern, traders expect a reversal in price direction.

three bullish and bearish three drives basic structure
three drives basic

The Potential Reversal Zone(PRZ) is the area where the pattern is complete. And the price is expected to reverse direction.

Simply, first, drive(fancy name for “wave”).

first wave in the 3-drive pattern
First drive

Next, a correction.

second wave in the 3-drive pattern
First correction

Followed by a second drive.

third wave in the 3-drive pattern
Second drive

And second correction.

fourth wave in the 3-drive pattern
Second correction

Finally, a third drive.

fifth and final wave in the 3-drive pattern
Third drive

At the end of the 3rd drive, expect a reversal.

reversal of direction after the completion of the pattern
Reversal from PRZ

Very simple structure. Yet, there are some conditions that you need to check before concluding it’s a three drive.

Here is a quick summary of the pattern conditions. We explain them in detail afterward.

Note that you need to be familiar with Fibonacci retracement and extensions.

Three drives patterns. Bullish and bearish detailed structure with Fibonacci ratios outlined
Bullish and bearish three drives patterns
  • Point C1 is at 0.618 or 0.786 retracement of wave 1(drive 1).
  • Point C2 is at 0.618 or 0.786 retracement of wave 2(drive 2).
  • Drive 2 is at the 1.271 or 1.618 extension of wave C1.
  • Drive 3 is at the 1.271 or 1.618 extension of wave C2.

The Bullish Three Drives Pattern

Bullish Three drives basic structures with ratios and PRZ explanation
Bullish three drives retracements and extensions

As the name implies, the bullish three drives pattern is a bullish reversal pattern. It consists of 5-waves. Three bearish main waves and two upside corrections. At the end of the pattern, traders expect an upside reversal in price direction.

In other words, the price forms a sequence of lower highs and lower lows, before reversing at the completion of the third downside wave.

Here is how it forms.

Bullish Three drives detailed structure with ratios
Bullish three drives
  1. Wave 1 (1st drive): the first wave is a normal bearish wave.
  2. Wave 2(correction): first correction C1, corrects to 61.8 or 78.6 of wave 1.
  3. Wave 3 (2nd drive): another bearish wave. It extends beyond the first wave low, to reach 1.27 or 1.618 Fibonacci extension for wave C1.

    At this stage, the price has formed an ABCD pattern.
  4. Wave 4(correction): a second corrective wave C2. Also corrects to 61.8 or 78.6 of wave 3.
  5. Wave 5 (3rd drive): the most important wave. Because it completes the three drives pattern.

    The 5th wave extends beyond the 3rd wave low. At this stage, you should be ready to watch the price near the 1.27 or 1.618 extension of C2 wave (We will discuss this later).

    This area is called the PRZ (Potential Reversal Zone). This is where the price is expected to reverse upwards.

The Bearish Three Drives Pattern

bearish Three drives basic structures with ratios and PRZ explanation
Bearish three drives retracements and extensions

The bearish three drives pattern is the exact opposite of the bullish 3-drive.

The bearish three drives pattern is a 5-wave pattern. Three bullish main waves, and two downside pullbacks. At the end of the pattern, traders expect a bearish reversal in price direction.

bearish Three drives detailed structure with Fibonacci ratios
Bearish three drives

Simply put, the price forms a sequence of higher highs and higher lows before reversing at the completion of the three upside waves.

Here is how it forms.

  1. Wave 1 (1st drive): the first wave is a normal bullish wave.
  2. Wave 2(correction): first downside correction C1 that corrects to 68.1 or 78.6 of wave 1.
  3. Wave 3 (2nd drive): another main bullish wave that extends above the first bullish wave high, to reach 1.27 or 1.618 Fibonacci extension for the first corrective wave C1.

    At this stage, the price has formed an ABCD pattern.
  4. Wave 4: a second corrective wave C2. It also corrects to around 68.1 or 78.6 of wave 3.
  5. Wave 5 (3rd drive): The most important wave is the third main bullish wave. It extends beyond the second bullish wave high.

    At this stage, you should be ready to watch the price near 1.27 or 1.618 of C2.

    This is where the price is expected to reverse to the downside, also called the PRZ (Potential Reversal Zone).

Tip: Retracement and extension ratios are important. However, If the price gets very close to the ratios but doesn’t touch, consider the pattern valid.

Variations of the Three Drives Pattern

We have seen many tutorials on the three drives pattern on Google’s first page. They claim strange rules for the ideal three drives pattern. The truth is:

There are 3 general rules to keep in mind.

#1
If a correction ends at 0.618 the extension should end at 1.618.
#2 If a correction ends at 0.786 the extension should end at 1.27.

first rule for Fibonacci ratios for an ideal three drives pattern
second rule for Fibonacci ratios for an ideal three drives pattern


According to one of the originators of the harmonic trading approach Scott Carney, for the three drives pattern to be ideal,

#3 Both corrections must end either at 0.786 or 0.618.

Meaning if C1 ends at 0.786, C2 also must end at 0.786.
The same goes for 0.618. if C1 ends at 0.681, C2 must also end at 0.618.

You need to keep these rules in mind because everything next relies on them.

Due to these rules, there will be 2 variations of the ideal 3-drive pattern:

Ideal Variations

Variation 1

First ideal variation of the pattern
Variation 1

Both corrections ended at 0.786, so the extensions must end at 1.272. This is what the rules stated.

  • C1 ends at 0.786, so wave 2 extends to 1.27.
  • C2 ends at 0.786, so wave 3 extends 1.27 (which will be the PRZ in this case).

Example:

First ideal variation chart example
Ideal Three drives pattern 1

Variation 2

second ideal variation of the pattern
Variation 2

Both corrections ended at 0.618, so the extensions must end at 1.618.

  • C1 ends at 0.618 so wave 2 extends to 1.618.
  • C2 ends at 0.618 so wave 3 extends 1.618(which will be the PRZ in this case).
second Ideal variation example
Ideal three drives 2

You probably noticed the symmetry in corrections and extensions in the two ideal scenarios above:

  • Correction 1 : 0.786
  • Correction 2: 0.786
  • Drive 2 extension: 1.27
  • Drive 3 extension: 1.27

and

  • Correction 1 : 0.618
  • Correction 2: 0.618
  • Drive 2 extension: 1.62
  • Drive 3 extension: 1.62

Remember: symmetry is the most important condition for an ideal 3 drive pattern.

Other Variations

I just mentioned the typical/ideal 2 variations of the three drives pattern structure.

In addition to these two, you need to take into consideration a few other variations that do not abide by the rules.

What if the corrections ended at different retracements?

In variations 3 and 4, the third rule doesn’t apply. As first and second corrections end at a different retracement.

Variation 3

third variation of the pattern
None-ideal variation 1
  • C1 ends at 0.618 so wave 2 extends to 1.618.
  • C2 ends at 0.786 so wave 3 extends 1.27(which will be the PRZ in this case).
third variation chart example
Three drives variation 3

Variation 4

fourth variation of the pattern
None-ideal variation 2
  • C1 ends at 0.786 so wave 2 extends to 1.27.
  • C2 ends at 0.618 so wave 3 extends 1.618(which will be the PRZ in this case).
fourth variation chart example
Three drives variation 2

Variation 5

In all of the scenarios we mentioned so far, the first two rules apply.

In this variation, these rules don’t apply. The only condition for the pattern to be valid is symmetry.

Examine this image.

fifth  variation of the pattern where the waves are symmetrical.
None-ideal variation 3

Few things to note,

  1. C1 and C2 corrections were to 0.786, however, the extension was to 1.618 (This breaks the rules).
  2. There is symmetry. Both corrections C1 and C2 were 0.786. Both extensions were to 1.62.

Here an example, the corrections were 0.618 and extensions 1.27.

example of the fifth variation on chart.
Three drives pattern variation 5

Although the pattern doesn’t abide by the ideal rules, it’s a valid one. This is because, in a three drives pattern, symmetry has higher priority than retracement and extension levels.

How to Trade the Three Drives Pattern(High Probability Strategy)

Here are the 4 steps :

  1. Identify the 3-drive formation
  2. Check for supporting factors
  3. Look for a final confirmation
  4. Define Your entry and exit Points

1. Identify the Pattern

The key to trading the three drives is to be able to identify the pattern before the reversal happens.

In other words, you need to be ready and monitor the price starting from levels near the 1.27 extension.

If you were able to spot the pattern, you should get ready to get into the trade. We will get into the process of getting into the trade soon. For now, let me walk you through the steps of identifying the 3-drives pattern.

How to Identify the 3-drives Pattern

Let’s walk through the steps through an example.

Step #1. Look for the price to form a simple 1-2-3 pattern
Step 1 Spot 1 2 3
Step 1 Spot 1 2 3
Step #2. Measure the retracement of the first correction C.

You do this by using the Fibonacci tool from point 0 to 1.

Step 2 Check retracement for C
Step 2 Check retracement for C

Indeed, the price retraced to 0.786. Do not forget that we only accept 0.786 and 0.618.

Step #3. Measure the extension of wave 2.

Use the Fibonacci tool from 1 to C to find the extension of wave 2.

Step 3 Measure the extension of wave 2.
Step 3 Measure the extension of wave 2.

Note that the second wave extended marginally above 1.27, and also didn’t close a candle above it. So it’s considered a valid 1.27 extension.

At this stage, all the conditions are valid so far. We will be waiting to see if the price forms the remaining waves.

For the three drives pattern to complete, we need to see another downside correction followed by the 3rd up wave.

Indeed the price made a downside correction C2.

Step #4. Measure the retracement for second correction C2.

Use the Fibonacci tool from point C to 2.

Step 4 Check retracement for C2
Step 4 Check retracement for C2

The price fell towards the 0.618 of wave 2 before forming a swing low. There is a chance that the second correction has been completed. It depends on if we get a new high above point 2.

Step #5. Plot possible Potential Reversal Zone (PRZ)
Step 5 Plot possible PRZ
Step 5 Plot possible PRZ

Identify the possible PRZ for the pattern using the Fibonacci tool. Start from point 2 to point C2.

At this stage, you should be ready to watch the price If it breaks point 2 to reach that 1.618. Why 1.618 not 1.271?

Because we already know from the rules mentioned earlier that if we get a 0.618 correction the next wave extension must be 1.618.

Step #6. Wait for a break of wave 2 high
Step 6 Wait for a break of wave 2 high
Step 6 Wait for a break of wave 2 high

Price has broken point 2.

The identification step has been completed.

Now, are there additional factors that support the short trade?

2. Check for Supporting Factors

In trading, the more things align the better. Ideally, we prefer to see at least two supporting factors. In addition to a final confirmation signal such as a reversal candlestick pattern.

Check three main factors:

  1. Support and resistance levels whether dynamic(trend lines, moving averages…) or static (horizontal levels, Fibonacci levels…).
  2. Price action patterns.
  3. Momentum indicators(Overbought/oversold signals, bearish/bullish divergence).

If we zoom out a bit we can have a broader view of what we have at hand.

Check for Supporting Factors
Check for supporting factors
  1. The 0.618 Fibonacci retracement from the main wave A-B is near the PRZ. Another good possible resistance level that supports our trade.
  2. The shaded red area is a horizontal resistance region. The price has reversed from this area multiple times(red arrows).
  3. Also, the ceiling of the short-term rising channel that’s carrying the current upside corrective wave.
  4. Stochastic is in overbought area.

We already have 4 supporting factors supporting our trade. The trade passed our criteria.

3. Look for a Final Confirmation

Finally, since we had at least two supporting factors, we will look now for a final confirmation signal near the PRZ.

As the price approaches the 1.27 extension level, you should start watching the price action for one of these two confirmation signals:

  • Reversal candlestick pattern.
  • Reversal chart pattern.
confirmation signal
Final confirmation

We have it. A gravestone Doji near the PRZ. Suggesting selling interest near this resistance zone and confirming the trade (Fore more info about reversal candles check out Forex reversal candles ).

4. Define Your Target, Entry, and Stop loss

entry, stop and tp placement
Entry, stop and tp placement

Entry: right after the gravestone candle, the entry should be placed a the opening price of the next candle.

Stop: you can use the average true range for stop placement. Check the current ATR value and put a stop loss 1 ATR above the PRZ. (Check how to use ATR for stop placement)

Take profit: Target for the three drives can be just above the C2 low.

Trade target hit
Target hit

Using this method, we got a trade slightly above 2:1 risk/reward ratio.

Pro Tip: Using Discretionary Approach for Entry & Exit

The above method is sufficient. You can ignore this part if it doesn’t make sense to you.

If you have more technical analysis experience, you could use your judgment while placing entries and exits for any trade.

For example, In this particular case, we know that if the price hit the take-profit mentioned above, that means the rising channel would be broken.

A breakout of the channel means the recent rise might be a correction and the price could be heading back to retest the bottom of the sideways range.

With that in mind, a second take profit level could be put near the bottom of the range and the D point.

a different method for tp placement

This method resulted in an average risk-reward of 2.8.

P.S. I haven’t shown examples of failed three drive patterns. In reality, there will be winners and losers, just like any other technical strategy or pattern. That’s why you should never forget to practice good money management and never risk more than 2% of your account on a single trade. As some trades will succeed and some will fail, with proper money management, you should end up with a net profit.

5. Be More Aggressive if Trading with the Trend

If the pattern is supported by the underlying trend. The trade would be a trend-following trade. Hence, It’s totally fine to be more aggressive. I mean by more aggressive two things:

  1. I will wait only for a final confirmation signal.
  2. Target can be placed at the low of the three drives(point zero on the chart below)

Here is an example of a bearish three drives supported by the prevailing trend.

Bearish three drives pattern supported by the prevailing trend.

If I see this, I immediately think that there is a good chance that the pattern is a correction of the most recent down wave(2nd blue line). And we could be heading back – at least- to retest the lows.

The final confirmation was a Doji candle.

In this example, we had more than we need. An additional supporting factor, as point 3(PRZ) coincided with the previous major swing low(resistance level marked by the red arrow).

  • The pattern is supported by the main trend
  • There is a resistance level that is supporting the pattern.

This setup provided more than a 4 to 1 risk-to-reward ratio.

Finally, I hope my explanation was clear enough. I strived to make it as simple as possible. You know it’s not simply to provide a simple explanation for real serious trading. Please let me know if the tutorial was hard to read. Leave your comment in the comment section below.

Last but not least, I strongly recommend that you read the below conclusion and final key points that shouldn’t be forgotten when you trade the three drives pattern.

Conclusion & Final Remarks

  • The three drives pattern has 2 main ideal variations. In addition to 3 other variations that shouldn’t be discarded.
  • The key correction levels are 0.681 and 0.786. The key extensions are 1.27 and 1.618.
  • If a correction ends at 0.618, the extension should end at 1.618.
  • If a correction ends at 0.786, the extension should end at 1.27.
  • Both corrections must end either at 0.786 or 0.618.
  • There should be at least two other factors supporting the three drives pattern trade.
  • Waiting for a confirmation signal such as a reversal candle or reversal chart pattern increases the chances of a successful trade.
  • Don’t be too precise with numbers. If the price reaches near a retracement or extension level but fails to touch it with a few pips difference, that should not invalidate the pattern. 
  • The previous remark is not valid on short timeframes(less than hourly).
  • If the price drops below or above the extension level but doesn’t close a candle, it is considered a valid extension.
  • Symmetry is an important factor that improves the reliability of the pattern.
  • Be more aggressive when the pattern is supported by a trend. Do not wait for many supporting factors to take the trade.

Note: Follow my Forex Trade Setups posts for setups based on the three drives.

I hope this adds value to your trading process. If you have any questions or need further clarification, do not hesitate to drop a comment below.

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Lu'ay Af.
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Lu'ay Af.
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