THREE DRIVES PATTERN

Three Drives Pattern is a price pattern that consists of three consecutive changes in the market. The first and third are strong moves in one direction, while the second is weaker and in the opposite direction. The pattern can be used in trading to determine direction and predict optimal entry-exit points. Below we take a closer look at what this tool is, how it is formed and how to trade it correctly.

What is the Three Drive Pattern?
• Three Drives Pattern in trading is a reversal pattern formed from three consecutive price movements in the market:
• First is an up or down swing that creates a trend;
• The second is a correction of the trend, which is usually about 50% - 61.8% of the first impulse leg;
• Third resumption of the trend, which is usually in the opposite direction of the correction.

In the case of a bullish trend, the Three Drive Pattern often indicates that the trend is about to end. This is the case because a second downward movement indicates high selling pressure on the market. If the second momentum is strong enough, it can lead to a reversal in the trend. In a bearish trend, the Three Drives Pattern often indicates that a bearish trend may end in a reversal. This is because the second upward movement indicates the following: buyers are starting to put pressure on the market. If the second momentum is strong enough, a trend-reversal scenario is possible.

The harmonic reversal pattern requires a competent approach on the part of the trader. It is important to use it in combination with other technical indicators, not to trade against the trend, and not to enter the market before the completion of the pattern. This means that the second movement is completed, and the market returns to the previous version in the direction of the first movement. The Three Drive Pattern is a useful tool that can be used in trading to determine the direction of the trend and forecast the optimal entry and exit points.


How the Three Drives Pattern is Formed?

Bullish Pattern
The bullish pattern of three movements consists of three consecutive downward impulses. It is formed when market makers place shorts and is formed as follows:
• A strong downward movement, which is usually the beginning of a trend.
• An upward correction in the form of a weaker impulse. Indicates attempts to stop the downtrend by market participants.
• A strong downward movement that exceeds the level of the first move.

Ratios of impulse legs:
First is 1.13 or 1.27;
Second is 0,786;
Third is 1,618.

In the case of a bullish pattern, it is worth considering selling after the completion of the third movement. Additional signals could be a change in indicators, a decrease in trading volume, a break of support, or a resistance level. As in the case discussed above, it is not recommended to use such a tool on its own, trade against the trend, or act early.

As you can see above, the market started the trend with the first downward impulse. Then it experienced an upward correction and resumed the trend with the third downward impulse. We always place a stop loss to protect against losses. After opening a position, wait for a pullback towards the first impulse to close the trade or add another position to it. Take into account that the price may be at the right point, but the pattern still may not work.


Bearish Pattern
A bearish pattern of three movements is a price pattern formed from three impulses showing growth. It is used by traders to find the best point to open a position against the market changes.

• A strong upward movement, which is usually the beginning of a bearish trend.
• A downward correction and a small market reversal that does not reach the level of the first impulse. This may be preceded by the fact that sellers show resistance and try to stop the trend.
• A powerful upward movement that exceeds the level of the first impulse. This indicates that the trend is continuing and that the end of the trend is not imminent.

Impulse legs have the following level:
First move is 1.13 or 1.27;
Second move is 0,786;
Third move is 1,618.

The ratios mentioned are not strict.
The pattern is more reliable if it is accompanied by other signals, such as:

• A change in trend direction indicators;
  
• an increase in trading volume;
  
• divergence with an oscillator;
  
• the presence of support below or resistance above.
  

Always use the tool in combination with other technical indicators to get an accurate prediction. Also, do not trade against the trend.

As you can see on the chart, the market started a bearish trend from the first impulse upwards. After it experienced a downward correction, it did not reach the minimum or level of the first impulse. Finally, the market resumed the trend with the third upward impulse.

How To Trade Using The Three Drives Pattern?

1. Find three consecutive movements on the chart that meet the criteria of the pattern.
2. Do not enter the market until the pattern is complete.
3. Make an entry at the initial point of the third move after it reaches the fibonichci extension level of 127.2% - 161.8%.
4. Place a stop above the 161.8% expansion level to protect losses in case the pattern doesn't work and goes lower or higher.
5. Close the trade when the market reaches the target profit at the 50% - 61.8% retracement of the whole pattern or you can at the level of the start of the first impulse.

As you can see in the chart below, the market started bullish - the first impulse. Then there was a correction, which did not reach the level of the first impulse. Finally, the market resumed the trend and finished with the third impulse, in which the price went down and completed the pattern. Note that the price was at a strong co-contraction level. You can draw a trend line from above. The last element that hinted at a change of trend was the divergence.

Use other technical indicators. The three-move pattern is a valuable tool, but it is not an accurate one. Using other tools, such as trend direction and volume indicators, can help improve the accuracy of your forecasts. Do not trade against the trend. A three-move pattern can be more reliable if it is used to confirm a trend. Be prepared for the pattern not to work like any other technical pattern.

Bottom line
The Three Drive Pattern is a reversal pattern. It can be used to determine the trend direction, as well as to predict potential entry and exit points. The optimal place to open a position is the level of the first impulse, and the exit point is reaching the target profit calculated using the Fibonacci ratio. Trading against the trend is riskier than trading in the direction of original market movement. This is because the price can continue to move in a given direction even if you see a reversal signal. This is why you need to proceed with caution and use other tools to back you up.

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