Harmonic Trading Patterns – Three Drives

[RichardCox 10]

The Three Drives harmonic trading pattern is similar to the ABCD harmonic pattern discussed previously but is characterized as having three dominant price legs (or drives) that signal the previous trend direction. Within these drives, two corrective waves can also be identified, as prices retrace some of the moves seen in the dominant trend. Traders who are familiar with Elliott Wave theory will notice some similarities here, as the overall structures follow some of the same themes.

 

The Three Drives Structure

 

When a three drives pattern emerges, it is a reversal signal for traders to begin considering contrarian “buy” positions in a downtrend or “sell” positions in a dominant uptrend. The pattern structure is one of the rare cases where symmetry in both price and time becomes a critical identifier, increasing the probability that a trend is reaching completion and that a reversal in imminent. For new harmonic traders, the pattern can be difficult to spot, but with a little practice the Three Drives structure becomes much easier to locate.

 

Specifically, the Three Drives pattern is composed of a series of three consecutive price peaks (in an uptrend) or troughs (in a downtrend), creating two interconnected ABCD patterns. Each drive is followed by a corrective leg and the third completion drive creates a Butterfly harmonic pattern (which will be discussed later).

 

Bullish Pattern

 

 

Bearish Pattern

 

 

Pattern Tendencies

 

The presentation of a Three Drives pattern suggests that strong bull or bear markets are becoming over extended, and a price correction will be needed so that prices trade more in line with historical averages. One of the key advantages of the pattern is that it tends to offer superior risk to reward ratios, as stop loss levels are kept extremely tight in the reversal zone. Failures in the pattern tend to suggest stronger continuation in the previously dominant direction.

 

Pattern Calculations and Variations

 

Calculations in the second and third drive are determined by the price and time durations seen in the first drive. Drives 2 and 3 will be measured as either 127.2% or 161.8% Fibonacci extensions of the retracements seen in the corrective A and C waves, which should be measured as the 61.8% or 78.6% retracements of the price swing seen previously. When markets are experiencing trends of greater strength, the retracements can be seen at the 38.2% or 50% retracement levels.

 

In addition to this, the time duration of the A and C corrective moves will be symmetrical, and this also holds true for the second and third drive extentions that complete the pattern. Warning signals of pattern failure can be seen with significant price gaps, as price activity is not seen as obeying the harmonic structure. Trades can be executed when the Three Drive structure is complete (not before) as this is the only way to determine the level of symmetry seen in price and time. Limit orders can be used as prices reach the B point (using the 1.272 extension) but confirmation needs to be undertaken so that the harmonic structure can be verified.

[kick buttkowski 10]

I have traded this particular pattern for many years and the reason is, it works! This is a pattern I look for every single day and almost always take it for a trade when it complete. If you haven't been looking for the Three Drives pattern, I would encourage you to do so. You will be glad you did. It works very well with futures.