How to Trade the Three Drives Pattern in Forex

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Contributor, Benzinga
June 29, 2023

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If you are looking for a reliable and profitable way to trade the forex market, you may want to learn about the three drives pattern. This harmonic chart pattern can help you identify reversal points and entry opportunities in any currency pair. 

In this article, you will learn what the three drives pattern entails, how to spot it on forex charts and how to trade it effectively. With this knowledge, you will be able to enhance your trading skills and results. 

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What is the Three Drives Pattern?

The three drives pattern is a harmonic chart pattern characterized by symmetrical price movements and identical Fibonacci projections within a 5-wave structure. This pattern suggests a potential reversal of the current trend after three consecutive and proportionate drives toward a top or bottom. It can occur in both bullish and bearish markets, depending on the direction of the drives. While similar to the ABCD pattern, the three drives pattern includes an additional leg and utilizes Fibonacci extensions rather than retracements. Although this pattern is relatively rare and challenging to identify, it can offer valuable trade opportunities when it does occur.

Identifying the Three Drives Pattern on Forex Charts

To identify the three drives pattern on forex price charts, look for a series of three consecutive higher highs or higher lows that form a W-shaped or M-shaped pattern. This pattern typically consists of five waves labeled 0-A-B-C-D-E.

A retracement should follow each drive. The first two retracements are labeled as A and B, while the third retracement is labeled as E. It is important to note that the labeling sequence should be 0-A-B-C-D-E rather than 0-A-B-C-E. The retracements should ideally reach the 0.618 Fibonacci level of the previous drive, indicating a common retracement level based on the Fibonacci sequence.

The completion of the third drive should occur near either the 1.272 Fibonacci extension of the previous retracement or the 0.786 Fibonacci retracement of the entire move from 0 to C. These Fibonacci levels provide potential targets for the completion of the pattern.

Ensuring that the pattern exhibits symmetry in both price and time is crucial. This means the drives and retracements should be similar in length and duration, creating a balanced and harmonious pattern. 

For a valid three drives pattern, the pattern must be unambiguous on the chart, without any forced or distorted interpretation. Traders should be able to identify and confirm the pattern easily.

Completing the third drive signals a possible reversal of the current trend, providing an entry opportunity for traders. However, it is necessary to combine this pattern with other technical indicators and analysis techniques to confirm the potential reversal and manage risk effectively.

How to Trade the Three Drives Chart Pattern

Now that you know how to identify the three drives pattern on forex charts, let's see how you can use it to trade effectively and profitably.

Entry Points

When trading a bullish three drives pattern, you would generally look to enter a long position when the price reaches the completion of the third drive near the 1.272 Fibonacci extension of B-C or the 0.786 Fibonacci retracement of 0-C and begins to show signs of a reversal. Note to wait for confirmation signals from other technical indicators or price action, such as a bullish candlestick pattern, a trendline break to the upside or an oscillator divergence that supports the potential reversal.

In contrast, for a bearish three drives pattern, you would typically seek to enter a short position when the price reaches the completion of the third drive near the 1.272 Fibonacci extension of B-C or the 0.786 Fibonacci retracement of 0-C and starts to exhibit signs of a downward reversal. Like the bullish pattern, waiting for confirmation signals from other technical indicators or price action is vital.

Setting Stop Losses

When trading a bullish three drives pattern, you would generally place your stop loss below the low of the third drive. This helps protect your trade from potential false breakouts or a continuation of the previous trend.

On the other hand, when trading a bearish three drives pattern, you would typically position your stop loss above the high of the third drive. This allows for some room to accommodate market noise and prevents premature stop-outs.

Depending on the pattern, placing the stop loss beyond the high or low of the third drive allows you to create a buffer zone that helps protect your trade from immediate reversals or temporary price fluctuations. This approach is aimed at giving your trade enough breathing room to potentially reach your desired profit targets while managing risk.

Take Profits for the Trade

When trading a bullish three-drives pattern, you would typically consider taking profits at the 0.618, 0.5 or 0.382 Fibonacci retracement levels of the entire move from 0 to E. These levels are often viewed as potential resistance zones, where sellers might enter the market and cause a reversal or price consolidation.

For a bearish three drives pattern, you would generally look to take profits at the 0.618, 0.5 or 0.382 Fibonacci retracement levels of the entire move from 0 to E. These levels are often seen as potential support zones, where buyers could step in and initiate a price bounce or reversal.

Considering these Fibonacci retracement levels, traders can identify potential areas where the price may encounter resistance or support based on historical price behavior. Note that these levels are not guaranteed reversal points but rather areas of interest where price reactions are more likely to occur.

Bearish vs. Bullish Three Drives Pattern

The three drives pattern can occur in bearish and bullish markets, signaling a possible reversal of the prevailing trend. The pattern has a similar structure in both cases but with opposite directions and implications.

The market forms three consecutive higher highs in a bearish three drives pattern, resulting in an "M-shaped" pattern on the chart. This pattern suggests a potential reversal of the prevailing uptrend, indicating that the bulls are losing momentum and the bears may assume control. Traders can look for selling opportunities when the third drive is completed and confirmed by other technical indicators or price action signals.

Conversely, the market forms three consecutive higher lows in a bullish three drives pattern, creating a "W-shaped" pattern on the chart. This pattern signifies a potential reversal of the existing downtrend, suggesting that the bears are losing steam and the bulls may seize control. Traders can seek buying opportunities when the third drive is completed and confirmed by other indicators.

Precision Trading With Three Drives Pattern

Discover the extraordinary power of the three drives pattern, a rare yet potent harmonic reversal phenomenon that reveals hidden market turning points. By harnessing its potential, you can enter trades with bullseye precision, fortify your risk management and unlock higher profitability levels.

Frequently Asked Questions 

Q

What is a drive pattern?

A

A drive pattern is a series of symmetrical price movements with identical Fibonacci projections in a 5-wave structure that signals a possible reversal of the current trend.

Q

What is the ABCD pattern strategy?

A

The ABCD pattern strategy is a harmonic trading technique that involves identifying and trading a 4-wave structure that resembles a lightning bolt on the chart.

Q

How do you trade a 3-drive pattern?

A

You trade a three drive pattern by entering the market when the third drive is completed and confirmed by other technical indicators or price action signals, placing your stop loss above or below the end of the third drive and taking profit at the Fibonacci retracement levels of the entire move from 0 to E.

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