The Three Drives pattern is one of the most powerful setups and one of my personal favorite chart patterns. The pattern is also self sufficient, it has distinctive entry and exit process. That’s why I created this concise straight to the point tutorial on how to trade the Three Drives pattern.
So let’s get started .
The three drives pattern is a 5-wave pattern. Three main waves and two corrections. The pattern can be bullish or bearish.
Bullish Three Drives pattern
Wave 1: First wave is a normal bearish wave.
Wave 2: Followed by first correction wave C1 (shouldn’t exceed 0.9 of wave 1).
Wave 3: Then another bearish wave that extends beyond the first bearish wave low, and reaches between 1.27 and 1.618 Fibonacci extension for the first correction wave. In other words, wave 2 extends beyond the low of wave 1, and reaches between 1.27 and 1.618 for C1.
Wave 4: Then followed by a second corrective wave C2. (Shouldn’t exceed 0.9 of 2nd bearish wave).
Wave 5: Then the most important wave is the third bearish wave, which extends beyond the second bearish wave low. At this point you should be ready to monitor the price from 1.27 to 1.618 extension for the C2 wave. This area it is called the PRZ (Potential Reversal Zone). Expect an upside rebound at this area.
Important tip: Symmetry increases the reliability of the pattern. If for instance, wave 2 extends 1.27 for the first corrective wave, then the wave 3 extends also to 1.27 for the 2nd corrective wave, expect the pattern to complete there. This is the ideal and best case.
Although symmetry is favorable, note that sometimes we can have different extensions and it will also work. For example, the first wave could extend to 1.271 and the second wave extend to 1.618.
Or first wave could extend to 1.618 and second wave completes at 1.271.
That’s why, the final step is key to increasing our chances.
Final step: Add a confirmation tool, such as candlestick pattern at the PRZ before going long.
The bearish three drives pattern is exactly the opposite of the bullish three drives.
Note that if the price drops below the extension level, but doesn’t close a candle below it, then it is considered valid extension. Also, don’t be too precise with numbers. i.e. if the price reaches near a retracement or extension level, but fails to touch it with few pips difference. That should not invalidate the pattern. This note is valid only on time horizons above the one-hour chart. If you are trading very short term time intervals , few pips count.
If you feel confused do not worry, things should be clearer with the chart examples below.
Typically, as I mentioned, the first and second extensions should be somewhere from 1.27 to 1.618.
In this example,
1- Wave one formed, then the price pulled back to and formed Wave CI.
2- I draw the fibonacci tool from the low to the high of wave C1.
3- Wave 2 extended just below the 1.27 extension level but failed to close candles below it. And therefore, I consider it a valid 1.27 extension.
4- The price corrected again to form wave C2.
5- I draw the fibonacci tool from the low to the high of wave C2.
6- The third wave hit the 1.27 extension and formed a long lower shadow candle, suggesting buying interest and confirmed my trade.
Entry should be put at the 1.27 extension level following the closing the of confirmation candle and target few pips below point C2. Stop loss should be below the confirmation candle low (you can use the ATR to help you place a proper stop).
Tip: Usually, and if there is symmetry in the pattern, if you connect the first and second low and extend the trend line, point three (potential reversal zone)will be around that trend line support.
Advanced tip: I usually care more about symmetry than the extension number. For example, I have found that the patterns can extend to a random Fibonacci extension, for example if the 2nd wave extends to 1.35 of C1 then pullback, then the third wave reaches 1.35 extension of C2, I would monitor the price for confirmation to initiate a trade.
I would like to mention that the information above are my own personal observations and conclusions. As you might find that different information somewhere else.
I hope this adds value to your trading process. If you have any question or need further clarification, do not hesitate to drop a comment below.