What are harmonic chart patterns?
In the field of technical analysis, harmonic trading represents an advanced area which, while more difficult than regular technical elements, can present fantastic trading opportunities once understood.
Harmonic trading combines Fibonacci ratios, symmetry and structural analysis to highlight patterns in the market which tend to yield exploitable outcomes. One of which is the “Three Drives Pattern”
What is the Three Drives pattern?
The “Three Drives Pattern” is a reversal pattern which comprises three swings of equal length in the same direction, corresponding to specific Fibonacci ratios to identify a potential reversal zone. The pattern can be both bullish and bearish which acts as a trend reversal and once highlighted, can be a precursor to powerful turns in the market.
There are two different types of Three Drives Pattern:
- Bullish Three Drive Pattern
- Bearish Three Drive Pattern
Bullish Three Drive Pattern
There are three main components in this pattern, as the name suggests a left shoulder, a head and a right shoulder. Other than these three components there are few other basic components which are explained in detail:
The three drive pattern is firstly a reversal pattern. Therefore, when this pattern emerges, there should already be a strong trend that is established. The three drive pattern is formed either at the top of a rally or a bottom of a decline.
The three drive pattern is distinguished by a series of three consecutive higher highs (in this case of a bullish three drive pattern) or a series of consecutive lower lows (in the case of a bearish three drive pattern).
Each of these respective highs and lows are then measured using the Fibonacci retracement and extension levels. While there are many different Fibonacci extensions, the levels we use in the case of spotting a three drive pattern is the 0.618% retracement and the 1.272% Fibonacci extension.
There are few rules for Three Drive Patterns as given below:
- The corrective wave A should be a 0.618 or 61.8% retracement of drive 1
- The corrective wave B should be a 0.618 or 61.8% retracement of drive 2
- Drive 2 should be an extension of 1.272 or 127.2% of the corrective wave A
- Drive 3 should be an extension of 1.272 or 127.2% of the corrective wave B
- The time frame that is required to complete drive 1 and drive 2 should be same while the time frame required to initiate the drive be making new bottoms should also have similar values
How to trade using the Three Drive Pattern?
First, it’s very important to remember not to “force” a 3-drive pattern. Price as well as time symmetry are key, so it’s something that should really stand out as three distinct, symmetrical drives to the bottom.
There are different ways of making trades using the patterns:
- Traders tend to place a pending buy order at the last 127.2% level while keeping the stop loss a few values below the recent swing high or low
- Traders can wait for the market to show a rejection of the price near the third drive. These rejection bars are visually distinguishable based on the long upper or lower wicks. Once the rejection bars are formed, traders can then place their entry and stop loss levels at the high and the low of such bars.
- Finally, traders can also wait for the price to break through the 127.2% level and place a pending order when the price falls below this low. Using the previously formed swing point high or low, the stops are then based accordingly.
Advantages/Limitations of Three Drives Pattern
Each and everything has its pros and cons, and so does the three drives pattern also. There are few advantages as well as limitations to the pattern, explained below:
- The biggest advantage is that the Three Drives Pattern is qualitative as well as quantitative using not only chart but also retracements levels
- Limitation being that the Three Drives Pattern cannot be forced upon, the price and symmetry should move in the exact way, which sometimes makes traders confusing
- Complexity arises when opposing patterns form from the same swings or timeframes
- Provide future predictions with accurate stop in advance making it leading indicator producing high probable set-ups