“Three-Drive” is one of the simplest but effective patterns of classical technical analysis and also known as “Three Indians”.
Its name suggests that the “Three-Drive” strategy involves identification of three points. These points should be on the same straight line, that is, the trend line. Here is an example.
The key to the classical strategy is that if you draw a trend line using two points, you can safely make a trade towards a trend at the point where the price touches this line for 3rd time. More details in the picture below:
- Enter the market at the point where the price touches a trend line for the third time – see the point (4) on the chart above.
- Take Profit – it is set where the price is expected to make a new high of the pattern – see the level (5).
- Stop Loss – it is set at the level of (6) the second low.
The nice thing about this strategy is that we open trades exclusively towards a trend, but it has a few nuances that we’re going to talk about further.
Quality Criteria for the “Three-Drive” Pattern
You will agree that if you draw all possible lines using two highs, there will be many of them as well as potential points of the third touch. This is why they need to be filtered out somehow. You can use the list of features of the ~reference “Three-Drive” pattern as a filter:
- 1. Timeframe. The “Three-Drive” pattern generates very weak signals on M30 and smaller timeframes. The reason is simple – not all market participants have time to notice it. This leads to the conclusion that the larger the timeframe, the better. However, you shouldn’t “overdo” in this case”: people can entirely forget about the third touch on the weekly interval (W1).
- The “Three-Drive” pattern implies entering the market only towards a trend, so you shouldn’t make a mistake and look for a counter-trend entry. See the picture for more details.
- It’s best when each of the touches resembles a hairpin as if the price gently pierces a trend line and immediately comes back. At that, the pattern’s design should be similar to a tier of arches. The point is that the pattern needs to be as clearly defined as possible so that the probability of its materialization will be higher.
- Here is another important nuance: a trend line should be drawn from the outside of the price, so that it doesn’t intersect with it. We need to make it clear that if the trend line was an infinite straight line, it wouldn’t have to intersect with the price in the near past.
Tips for Trading With the “Three Indians” Pattern
We will give you some recommendations in order to help you avoid common mistakes when trading with this strategy:
- Don’t mindlessly open a trade shortly after the price touches a trend line for the third time assuming that price is going to rebound from it for sure. The given pattern can act as a signal confirmation or a favorable point of entry, but not as an entry signal. Therefore, it is necessary to have a basic signal not to be exposed to such situations.
- As opposed to the previous paragraph, the price does very often respond to the third touch, even if it’s not going to implement this trading scenario – so what's happening is a small rebound. We mean such a situation where the price rebounds from a trend line, doesn’t go far away from it, and breaks it out. Perhaps, it is a kind of manipulation. In such cases, it makes sense to properly assess the situation and move Stop Loss to breakeven, if events are expected to happen in this way.
- Be careful when placing a Limit order according to this strategy. Given that a trend line is skew and we cannot know the exact time when the price touches this line for the 3rd time, we have to constantly move a Limit order in this situation. This is why it is better to open a trade manually at the time of the third touch to control over what’s happening.
Bullish “Three-Drive” pattern – enter the market towards an upward trend to buy. The trend line is drawn below the price.
Bearish “Three-Drive” pattern – enter the market towards a downward trend to sell. The trend line is drawn above the price.
Examples of Trading With the “Three-Drive” Pattern in Forex