Master Fibonacci technical analysis to unlock the hidden secrets of forex trading

Why Are Traders Using Fibonacci?

If you often find yourself feeling that price movements in the forex market are unpredictable, then you might want to understand a tool revered by countless professional traders—Fibonacci technical analysis. This method is not created out of thin air but originates from a mathematical pattern that is everywhere in nature and the universe.

Since 13th-century Italian mathematician Leonardo Pisano Fibonacci first introduced the golden ratio into the Western world, the mysterious 0.618 and 1.618 have begun to influence human perception of the world. In modern financial markets, traders have discovered that the rhythm of asset price rises and falls also follows this ancient mathematical pattern.

The Mathematical Logic Behind the Golden Ratio

The Fibonacci sequence may seem simple, but it contains profound market implications. The core characteristic of this sequence is: each number is the sum of the two preceding ones.

Observing this sequence (0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597…), an astonishing phenomenon appears—when you divide a number by its previous number, the quotient always approaches 1.618. For example, 1597 ÷ 987 ≈ 1.618, 610 ÷ 377 ≈ 1.618. This ratio is the legendary golden ratio.

Conversely, when you divide a number by the following number, you get 0.618 (the reciprocal of 1.618). Further, dividing a number by a number two places larger results in approximately 0.382. These seemingly abstract numbers manifest in trading as Fibonacci retracement levels of 38.2% and 61.8%, becoming key levels for traders to identify support and resistance.

Fibonacci Retracement: Finding the Optimal Entry Point

After significant price increases or decreases, traders are most concerned about: where will it retrace to? This is where Fibonacci retracement comes into play.

Imagine the gold price rising from $1681 to $1807.93. During this upward cycle, the retracement levels are calculated by subtracting the retracement amount (e.g., $126.93) multiplied by different Fibonacci ratios from the high:

• 23.6% retracement level: $1777.97
• 38.2% retracement level: $1759.44
• 50% retracement level: $1744.47
• 61.8% retracement level: $1729.49
• 78.6% retracement level: $1708.16

These levels are not arbitrarily chosen but are focal points of market participants’ psychological expectations. When the price pulls back, many traders place buy orders at these levels, and vice versa.

Practical Application: How to Use Fibonacci in Trading

Application in an Uptrend

During an uptrend, traders need to confirm three key levels: the bottom point A, the top point B, and a Fibonacci retracement level C. Once the price stops falling at C and begins to rebound, traders can place buy orders here, as this often becomes a strong support level.

Application in a Downtrend

The logic is reversed. During a decline from top point A to bottom point B, traders look for resistance levels where the price might bounce back. When the price rebounds to a Fibonacci level D, facing selling pressure and a pullback, this becomes a potential resistance level.

It’s important to note that a single Fibonacci level is often not reliable enough. Professional traders combine it with moving averages, Relative Strength Index (RSI), or other technical indicators to enhance the validity of signals.

Fibonacci Extensions: The Art of Setting Target Prices

If retracements help you find entry points, then extension levels determine your exit strategy.

Fibonacci extensions are based on the same mathematical principles but in the opposite direction. Common extension levels include 100%, 161.8%, 200%, 261.8%, and 423.6%. These levels inform traders about potential target zones if the trend continues.

For example, in an uptrend, after buying at a Fibonacci retracement level, traders can set profit targets at the 161.8% extension level. When the price reaches this preset level, traders might consider closing or taking partial profits. The same logic applies to downtrends.

The Complete Trading Process Incorporating Fibonacci Analysis

A full trading cycle should look like this:

1. Identify the trend: Confirm whether the price is in an upward or downward main trend
2. Mark key levels: Find the recent high and low points
3. Draw retracement lines: Use Fibonacci retracement levels to find support and resistance
4. Confirm signals: Combine with other technical indicators to verify the validity of these levels
5. Place orders: Set buy (or sell) orders at retracement levels, and take profit at extension levels
6. Risk management: Set stop-loss orders outside the previous Fibonacci levels

Key Points to Note

Although Fibonacci technical analysis is widely used in the forex market, it is not foolproof. Many other factors influence the market—central bank policies, economic data, geopolitical events, etc.—which can cause prices to break through expected Fibonacci levels.

Therefore, the smartest approach is to treat Fibonacci as a reference tool rather than an absolute prediction. Always maintain risk awareness, avoid over-relying on a single indicator, and this is the foundation for long-term stable profits.