Three Drives Reversal

Entry Logic

• Enter short on the completion of the third drive, which should be accompanied by bearish divergence on the MACD or RSI.
• Confirmation is a break of the trendline connecting the lows of the three drives.
• Use a 4-hour timeframe for this pattern.
• Entry should be below the 20-period EMA.
• This pattern works best in a mature uptrend.

Exit Logic

• The profit target is the 61.8% retracement of the entire three-drive pattern.
• Scale out 50% at the 38.2% retracement.
• Trail the remaining position with a 50-period SMA.
• Exit if price closes back above the high of the third drive.
• Exit on a confirmed bullish reversal pattern.
• Exit if the trade is not profitable within 10 days.
• Exit if the MACD shows a bullish crossover.

Stop Loss Structure

• Place a hard stop above the high of the third drive.
• A soft stop is a close above the 20-period EMA.
• Maximum dollar loss is $2000 per trade.
• Maximum percent loss is 4% of the account.
• The structural stop is the high of the third drive.

Risk Management Framework

• Risk 2% of the account per trade.
• Daily loss limit is 6% of the account.
• Weekly loss limit is 12% of the account.
• Maximum drawdown is 35%.
• Minimum risk-reward ratio is 2:1.

Position Sizing Model

• Use a reduced position size for this long-term setup.
• Adjust size based on the volatility of the instrument.
• No conviction sizing is used.
• Do not scale into trades.
• Scale out at predefined Fibonacci levels.

Trade Filtering

• Avoid trading this pattern on highly volatile instruments.
• Requires a clear three-drive pattern with bearish divergence.
• Trade only major forex pairs and commodities.
• Avoid trading this pattern during major news events.
• Do not trade in markets with no clear trend.

Context Framework

• The daily chart should show an extended uptrend.
• Price should be far above the 200-day SMA.
• The setup should occur at a major resistance level.
• The weekly chart should show overbought conditions.

Trade Management Rules

• Do not move the stop to breakeven until the first profit target is hit.
• Scale out at the 38.2% and 61.8% retracement levels.
• Do not add to winning trades.
• Be patient, as this pattern can take a long time to play out.

Time Rules

• This pattern can form over several weeks or months.
• The entry can be taken at any time of the day.
• The trade can last for several weeks to months.

Setup Classification

• A+ setup: Perfect three-drive pattern, clear bearish divergence, strong overbought conditions.
• A setup: Clear three-drive pattern, some divergence, overbought conditions.
• B setup: Messy three-drive pattern, no divergence, neutral market.
• C setup: No clear pattern, avoid.

Market Selection Criteria

• Trade EUR/USD, Gold, and Crude Oil.
• The instrument should have a clear trend.
• The instrument should have a history of respecting Fibonacci levels.

Statistical Edge Metrics

• Expected win rate is 60%.
• Average win is 4R.
• Average loss is 1R.
• Profit factor is 2.4.
• Expectancy per trade is 1.4R.

Failure Conditions

• The strategy fails if the third drive is not the final one.
• A common failure is a consolidation after the third drive, followed by another move higher.

Psychological Rules

• Have the patience to wait for the pattern to complete.
• Do not get discouraged by the long timeframes.

Advanced Components

• Use Elliott Wave analysis to confirm the end of a five-wave sequence.
• A sentiment indicator can help gauge market extremism.
• Avoid trading this pattern on correlated assets.
• The monthly chart should show a potential long-term top.

Location

• The setup is strongest at a major, multi-year resistance level.
• The setup is weakest in a sideways market.
• The location of the pattern is the most important factor for success.