Master the Fibonacci sequence to unlock the secrets of forex trading

Why Are Traders Obsessed with This Tool?

In the forex market, many top traders use the same method to identify support and resistance levels — it is based on the Fibonacci sequence and the derived golden ratio. This is not some mystical concept, but a mathematical law that has been repeatedly validated in nature and financial markets for centuries.

When you observe historical price movements, you’ll find that reversal points often occur at certain specific percentage levels. That’s why traders set buy or sell orders at these levels — because they tend to become consensus points among market participants.

The Mathematical Logic of the Fibonacci Sequence

The core of the Fibonacci sequence is simple: each number is the sum of the two preceding ones, extending infinitely.

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765…

An interesting phenomenon when observing this sequence:

When you divide any number in the sequence by the previous number, the result approaches 1.618. For example, 1597 ÷ 987 ≈ 1.618; 610 ÷ 377 ≈ 1.618. This 1.618 is the famous golden ratio.

Conversely, dividing a number by the following number yields 0.618. For example, 144 ÷ 233 ≈ 0.618; 610 ÷ 987 ≈ 0.618. This 0.618 is the reciprocal of 1.618 and forms the basis of the 61.8% Fibonacci retracement level.

If you divide a number by a number two places larger, the result approaches 0.382. For example, 55 ÷ 89 ≈ 0.382; 377 ÷ 987 ≈ 0.382. This 0.382 forms the basis of the 38.2% Fibonacci retracement level.

These three key ratios (1.618, 0.618, 0.382) are the numbers traders truly need to remember.

Fibonacci Retracement: A Powerful Tool for Finding Entry Opportunities

Fibonacci retracement lines (also called golden ratio lines) help traders identify potential stopping or reversing points during a correction.

How It Works

Traders draw retracement lines between any two price points (usually recent high and low). The system automatically calculates five key levels: 23.6%, 38.2%, 50%, 61.8%, and 78.6%. These levels represent zones where the asset price might pause or reverse.

For example, if EUR/USD rises from a certain low to 1.5 and then retraces 0.354, it means a 23.6% retracement, which corresponds exactly to the Fibonacci ratio.

Practical Example

Suppose gold prices rise from 1681 to 1807.93. Using these two points, calculate the retracement levels:

• 23.6% retracement: $1807.93 - ($126.93 × 0.236) = $1777.97
• 38.2% retracement: $1807.93 - ($126.93 × 0.382) = $1759.44
• 50% retracement: $1807.93 - ($126.93 × 0.5) = $1744.47
• 61.8% retracement: $1807.93 - ($126.93 × 0.618) = $1729.49
• 78.6% retracement: $1807.93 - ($126.93 × 0.786) = $1708.16

When gold drops to the 61.8% level, many traders see it as a support level and place buy orders at this level.

How to Apply in an Uptrend

When an asset experiences a significant rise and begins to retrace, traders draw Fibonacci retracement lines from the low point(A) to the high point(B). These retracement levels (23.6%, 38.2%, 50%, 61.8%, 78.6%) often become new support levels. Traders wait for rebound signals at these levels; if confirmed, they consider entering.

How to Apply in a Downtrend

When an asset drops sharply, traders draw retracement lines from the high point(A) to the low point(B). These levels then become resistance points. When the price bounces up from below and hits these resistance levels, it often reverses downward again.

Traders usually combine this with other technical indicators or candlestick patterns to improve success rates.

Fibonacci Extension: Mapping Profit Targets

If Fibonacci retracement helps you find entry points, Fibonacci extension helps you determine when to exit.

What Are Extension Levels

Fibonacci extension levels are derived from the key ratio 1.618. Common extension levels include: 100%, 161.8%, 200%, 261.8%, and 423.6%.

Using in an Uptrend

Identify three key points: X (recent low), A (recent high), B (a Fibonacci retracement level). Once these are confirmed, traders can place buy orders at B and predict where the price might go based on Fibonacci extension levels. When the price reaches point C (an extension ratio level), it’s time to consider closing.

Using in a Downtrend

Similarly, X becomes a high point, A a low point, and B a retracement level. Traders place sell orders at B, and when the price reaches extension point C, they consider exiting.

Complete Trading Logic

The application of Fibonacci sequence in trading can be summarized as: use Fibonacci retracement to find support and resistance levels, thus determining your entry points; use Fibonacci extension to identify potential exit targets. Using both together helps traders build a more complete trading plan.

Remember, the reason Fibonacci ratios are effective in financial markets is because market participants are all using them. When enough people place orders at the same levels, those levels truly become support or resistance.