Three Drives Pattern Explained

The Three Drives Pattern is a well-known harmonic chart pattern. It is a relative of the ABCD pattern, for reasons you will learn about in a bit.

This pattern was mentioned in Robert Prechter‘s famous book “Elliot Wave Principle.”

In this post, I will explain how to identify it and show you how it is traded. If you want to learn how this pattern works, this post will give you everything you need to know.

But that's not all…

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.

Here we go…

How to Identify the Three-Drive
The pattern consists of a series of three higher highs or lower lows, which signals a potential reversal.

SEE ALSO: How this Trader Was Able to Quit His Dream Job to Trade for a Living

Sometimes the reversal can be a huge move because the built-up pressure is finally released. Not always of course, but that is what happens when it works well.

Are there time and distance requirements for the moves? Some books say yes, others say no. So I'm going to take the most basic explanation that I think all Three Drives traders can agree on.

Let's take a look at how it works…

Bullish Three Drives
Bullish 3 drives example

In the bullish version of this pattern, there are three drives or pushes in the upward direction. After each push, there is a retracement, marked A and B. The retracements are a 0.618 Fibonacci retracement of the previous drive.

The next drive needs to end near the 1.272 Fibonacci extension for the price action to qualify for the for the pattern. When price gets close to the drive 3 point at the 1.272 extension, you would put in an order to sell.

Your target would be the 0.618 retracement of the entire move from point zero to the top of drive 3.

At least that is how the textbooks teach it. So that is where you should start testing it.

Let's take a look at a real example, so you can get a better idea of how this works.

This is the GBPUSD 4 hour chart on May 16, 2016, on TradingView and Oanda data. For those of you who want to follow along at home.

Here's what the chart looks like when we mark point zero.

Chart 1 - Point Zero

The first retracement hits the 0.618 Fibo level almost exactly.

Chart 2 - Drive 1

Now if you Fibo the retracement, you will see that price extended way 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.

Chart 3 - Fibonacci extension violation

However, just for fun, let's keep going…

The next retracement also blows through the 0.618 retracement level.

Chart 4 - Invalid retracement

The next push hits the 1.272 Fibonacci extension exactly.

Chart 5 - Fibonacci extension

Then when we look for a profit target, the 0.618 Fibo retracement of the entire move.  In this example, that gets hit easily.

Chart 6 - Profit target

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

Should I follow the system exactly or should I allow the rules to be bent?

Well, that all depends on what your backtesting tells you.

Bearish Three Drives
Then of course, the bearish pattern is the same thing, but upside down.

Bearish 3 Drives

How to Trade this Harmonic Forex Pattern
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.

It is a good starting point for you to do your own testing and optimization.

There are basically three ways that you could enter a trade:

Put in a pending order at the last 1.272 level, with a stop loss guess
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 on the other side of the bar
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
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.

Potential Optimizations
When you are testing, one way that you could potentially optimize your entry, is to look for divergence of some sort. RSI can be a good indicator to use.

RSI divergence example

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.

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.  Resistance level example

How to Backtest the Three Drives Pattern
Alright, now let's get down to business.

After most traders read about a trading strategy, they go directly into trading it in their live account.

…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.

Here's a short list:

You misread the instructions
You are risking too much per trade and are freaking out every time your trade moves one pip
The trading method doesn't actually work and it turns out that everything on the internet is not true
You start trading it correctly and forget the rules because you didn't write them down
You think you know better and keep changing the rules
You second guess yourself and miss good trades
And more
These are natural mistakes that all humans make. Myself included. So why risk your hard-earned money on your unproven skills?

First, write down the exact rules of the system that you want to test. You can download the backtesting plan worksheet for free here. This will ensure that you do not deviate from your plan.

Next, you need to backtest your system and make sure that it has positive expectancy. Fire up Forex Tester and test your system. If it does not work in backtesting, then it certainly won't work in live trading.

Once you have a system that works in backtesting, then move it into a demo account. Do not risk real money at this point.

Only when you are comfortable in a demo account, should you even consider trading live.

To learn all of these steps in detail and much more, join the Forex Trading Strategy Development Program.

Other Resources
Here are some other resources that you can use to learn more about this chart pattern. It is always a good idea to look at how others are trading a chart pattern, to get ideas on how you can improve your strategy.

You don't have to follow them exactly and you will probably throw out a lot of the ideas. But it only takes one good idea to dramatically improve your results.

TradingView Three Drives tag – These are charts that community members have posted on the TradingView website.
YouTube videos – Here are the search results for videos related to this chart pattern.
A Close Cousin: The ABCD Pattern
One pattern that you will hear associated with the Three Drives is the ABCD Pattern. This could also be called the Two Drives pattern…I guess.

ABCD pattern

If I had to choose, I would personally start testing the Three Drives first because there is a greater chance that price will reverse after three moves, than two. Price simply has to travel a longer distance and therefore will be more “tired.”

Conclusion
So that is how you identify the Three Drives technical chart pattern. Remember that just because you see other traders using this pattern, does not mean that it will work for you.

You need to backtest it for yourself and figure out if it matches your trading personality.

Never take anyone's word that a trading system works.

Not even me 🙂

Do you own homework and you will progress much faster as a trader.



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