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Understanding the Nuances of The Three Drives Pattern

24 Aug 2023

Introduction

The Three Drives Pattern is a harmonic chart pattern. It signals a possible reversal in the market. It is based on the Fibonacci ratios and the Elliott Wave Principle. If you are a trader, understanding this pattern is crucial.

Let's discuss the meaning of this pattern, how to identify it, and how to trade it.

What is the Three Drives Pattern?

It is a reversal pattern that consists of three consecutive and symmetrical drives to a top or bottom, followed by a correction in the opposite direction. Three Drives can be either bullish or bearish, depending on the direction of the drives.

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The bullish Three Drives Pattern occurs when the price makes three higher highs, each followed by a retracement. The bearish Three Drives Pattern occurs when the price makes three lower lows, each followed by a retracement.

The key feature of the pattern is that each drive completes at a specific Fibonacci extension of the previous retracement. The most common extensions are 1.13, 1.27, and 1.618. The retracements are usually 0.618 or 0.786 of the last drive.

How to Identify the Three Drives Pattern?

To identify the Three Drives Pattern, you need to look for three distinct and symmetrical drives to a top or bottom on your chart. You can use any time frame, but higher time frames tend to produce more reliable signals.

You can use the following steps to identify the pattern:

  • Locate point zero, which is the starting point of the first drive.
  • Draw a Fibonacci retracement tool from point zero to the end of the first drive (point 1).
  • Identify point A, where the first retracement ends at 0.618 or 0.786 of the first drive.
  • Draw a Fibonacci extension tool from point zero to point A, and extend it to point 1.
  • Identify point 2, where the second drive ends at 1.13, 1.27, or 1.618 of point A.
  • Draw another Fibonacci retracement tool from point 1 to point 2.
  • Identify point B, where the second retracement ends at 0.618 or 0.786 of the second drive.
  • Draw another Fibonacci extension tool from point A to point B, and extend it to point 2.
  • Identify point 3, where the third drive ends at 1.13, 1.27, or 1.618 of point B.
  • Check if the pattern meets the symmetry criteria in terms of price and time.

If you correctly identified all these points, you have found a potential Three Drives Pattern on your chart.

How to Trade the Three Drives Pattern?

To trade the Three drive pattern, you must wait for confirmation that the reversal occurred after completing the third drive. You can use various methods to confirm the reversal, such as candlestick patterns, trend lines, indicators, or volume.

Once you receive confirmation, you can enter a trade in the opposite direction of the drives. For example, if you have identified a bullish Three drive pattern, you can enter a long position after the price reverses from point 3.

Your stop loss should be placed below (above) point 3 for a bullish (bearish) pattern. This is where the pattern becomes invalid.

Your profit target should be based on the Fibonacci retracement level of the entire move from point zero to point 3. The most common target is 0.618 for this move, but you can also use other levels, such as 0.382 or 0.786.

How Can I Backtest the Three Drive Pattern?

Backtesting means testing a trading strategy on historical data to evaluate its performance and validity. To backtest the Three Drives Pattern, you need to follow these steps:

  • Choose a market and time frame on which you want to test the pattern.
  • Apply the Fibonacci tools and the Elliott Wave Principle to identify your chart's potential Three Drives Patterns.
  • Define your entry, exit, and stop-loss rules based on the pattern criteria and your trading style.
  • Record the results of each trade, such as the entry price, exit price, profit or loss, and duration.
  • Analyse the results using statistical measures, such as the number of trades, win rate, risk-reward ratio, average profit or loss, maximum drawdown, and profitability factor.
  • Compare the results with a benchmark, such as a buy-and-hold or random entry strategy.
  • Optimise and refine your strategy based on the results and feedback.

Backtesting can help you gain confidence and improve your skills in trading the Three Drives Pattern. However, you should know the limitations and pitfalls of backtesting, such as data mining, curve fitting, overfitting, and survivorship bias. 

Conclusion

The Three Drives Pattern is not very common, but it can be rewarding when it occurs. It is worth watching for this pattern on your charts, as it can signal a significant change in the market trend.

 

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