Beginner traders mostly examine the market with the foreign eye that most beginners adopt to view new things. “Wow,” they think. “Market movements are amazingly spontaneous!”
“The movements are unpatterned! Raw even! There can’t possibly be a way to determine these things.” They think. But is that true?
There are many technical elements, in fact, to determine and analyze market trends. Even beyond the technical elements, there are fundamentals, hi-impact news that drives market movements.
Right now, though, the fundamentals are not our focus. Instead, we will focus on how the market movements can be predicted using one very essential technical element called the Fibonacci Price Theory.
What is the Fibonacci Price Theory?
The Fibonacci price theory is a tool for technical analysis that relies on the fact that the market prices will always attempt to set up new price highs and new price lows within a trend.
The market is always in motion. It is either looking to break upward or plummet, or consolidate within a given range. But it is always in motion, and as long as the market is open, the prices are trying to establish new highs and low.
But just how does it work and why is it important?
Understanding the basics of the Fibonacci Price Theory
Reversals happen when market prices fail to continue establishing new price lows or new price highs and breaks below or above a recent critical price level. The Fibonacci Price Theory helps us detect these market price reversals.
So how does the Fibonacci help determine when the market embraces a reversal? The Fibonacci Price Theory uses two tools.
- Major Price Pivots
- Minor Price Pivots
Major Price Pivots are points in the market where the new major highs and lows established become very crucial price tops and bottoms. If you remember, as we have earlier discussed, the market is always looking to land on new highs and lows. It is important to pay attention to these highs and lows formed because they will become the basis of our analysis in days to come.
Now, Minor Price Pivots are points on the market where the new highs and lows formed do not constitute crucial price tops and bottoms. However, they are still very vital in determining the points where the market reverses its direction.
Working with the Fibonacci Price Theory
Your job as a trader is to combine both the major and minor pivot points. The goal is to be able to use these tools to predict reversals of market prices accurately.
This goal can only be achieved through the careful study and observation of the pivot points.
The Fibonacci Price Theory, as earlier stated embraces the fact that prices are always attempting to establish a new high or low within a trend. The pivot points of the Fibonacci Price Theory helps us to accurately determine the crucial points where market reversals are most likely to occur.