The essential Golden Ratio rule for forex trading: How to accurately bottom out with Fibonacci retracement?

Why Are Traders Using Fibonacci?

If you’ve been active in the forex market, you’ve definitely heard of Fibonacci. This technical analysis method, originating from 13th-century Italian mathematician Leonardo Pisano (nicknamed Fibonacci), has remained popular in financial markets due to a mysterious mathematical secret—the Golden Ratio.

Simply put, the Golden Ratio is a “harmonious proportion” that repeatedly appears in nature and markets. From galaxies to human facial features, from petal arrangements to stock market trends, this ratio is everywhere. Traders leverage this fact, transforming mathematical patterns into trading signals.

What Is Hidden Behind the Mysterious Fibonacci Sequence?

The Fibonacci sequence is quite simple: each number is the sum of the two preceding ones.

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

The key point here is—when you divide any number in the sequence by the previous one, the result always approaches 1.618 (the Golden Ratio). For example, 1597 ÷ 987 = 1.618, 610 ÷ 377 = 1.618.

Conversely, dividing a number by the one that follows yields 0.618 (the reciprocal of 1.618). For example, 144 ÷ 233 ≈ 0.618, 610 ÷ 987 ≈ 0.618. This forms the mathematical basis of the 61.8% Fibonacci retracement level.

Going one step further back: 55 ÷ 89 ≈ 0.382, 377 ÷ 987 ≈ 0.382. This gives us the 38.2% Fibonacci retracement level.

These three key ratios—1.618, 0.618, 0.382—become the golden rules for predicting market turning points.

Fibonacci Retracement: How to Find Hidden Support and Resistance Levels?

What is Fibonacci Retracement?

Imagine a strong price rally followed by a pullback. The key question is: at which level will the price bounce back? Fibonacci retracement lines are tools designed to answer this.

Traders draw this line between two points (usually the highest and lowest prices), and the system automatically marks five key levels: 23.6%, 38.2%, 50%, 61.8%, and 78.6%. These levels often serve as support or resistance zones—areas where the market may pause or reverse.

Real-World Example

Suppose EUR/USD rises from 1.50 to 1.854, then begins to retrace. When the price falls back into the range between 1.50 and 1.854, drawing Fibonacci retracement lines reveals clear support levels—such as a sudden halt at the 61.8% level. This is no coincidence; market psychology is at play.

Take gold as another example: the price rises from 1681 to 1807.93, a gain of 126.93 USD. Using Fibonacci retracement:

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

These levels often act as defensive zones for bulls or bears.

How to Use Fibonacci Retracement in Trading? Practical Application

In an Uptrend

When a rally begins to retrace, traders should:

1. Identify the lowest point (A) and the highest point (B)
2. Draw Fibonacci retracement from A to B
3. When the price retraces to 61.8% or 38.2%, and if a reversal signal appears, it’s a great buying opportunity
4. Set the retracement level as a support level and place buy orders there

In a Downtrend

The logic is reversed:

1. Identify the highest point (A) and the lowest point (B)
2. Draw Fibonacci retracement from A to B
3. When the price bounces back to 38.2% or 61.8%, encountering a resistance level, it signals a sell opportunity
4. Place sell orders at this level

Key Tips

Relying solely on Fibonacci retracement isn’t enough. The most professional approach combines it with other technical indicators (like moving averages, RSI, MACD) and candlestick patterns. When multiple signals align at the same Fibonacci level, the probability of a reversal significantly increases.

Fibonacci Extension: Not Just for Entry Points, But Also for Exit Targets

What Is Fibonacci Extension?

If retracement helps identify when to enter, then extension levels help determine when to exit.

Fibonacci extension levels are based on the 1.618 Golden Ratio, with levels like 100%, 161.8%, 200%, 261.8%, and 423.6%. These are used to forecast potential target zones during price advances or declines.

In an Uptrend

1. Identify three points: X (low), A (high), B (retracement level)
2. Enter a buy position at B
3. Calculate the potential extension target © based on the move from B
4. When the price reaches the extension level (e.g., 161.8%), traders can consider taking profit

In a Downtrend

1. Identify: X (high), A (low), B (retracement level)
2. Enter a sell at B
3. Calculate the target zone for further decline
4. When the price hits the extension level, close the position to lock in gains

The Core Logic of Fibonacci Trading

In simple terms:

• Fibonacci Retracement = Find support and resistance = Decide when to enter
• Fibonacci Extension = Find target prices = Decide when to exit

Using these tools together creates a complete trading strategy framework. Because they are based on mathematical patterns and market psychology, they are effective across all markets (forex, stocks, commodities).

Mastering Fibonacci retracement is like holding a key to unlock market patterns—while not 100% precise, over the long term, it can greatly improve your win rate and capital management efficiency.