Traders Must Learn: The Deadly Application of Fibonacci in the Market

Why Are Traders Using Fibonacci?

If you haven’t used Fibonacci indicators when trading forex, precious metals, or other assets, you might be missing out on one of the most practical tools in the market. Why is this method so popular? Because it helps you quickly identify support and resistance levels, which are key to determining entry points and profit targets.

The underlying logic of Fibonacci indicators comes from a magical ratio—the Golden Ratio. This ratio is not only widespread in nature but also mysteriously appears in financial markets. Traders leverage this ratio to predict where asset prices might reverse or stall, with success rates far higher than blind trading.

The Chinese Name and Origin of Fibonacci

The name Fibonacci comes from the nickname of Leonardo Pisano, an Italian mathematician from the 13th century. He introduced the Indian mathematician’s invention of the Golden Ratio to the West, which was eventually named the Fibonacci Ratio. Simply put, Fibonacci involves analyzing the market using specific numerical ratios.

The Logic Behind the Magical Sequence

The core of the Fibonacci sequence is simple: each number is the sum of the two preceding ones. Take a look at this sequence:

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

Observing these numbers reveals an astonishing pattern: when you divide any number in the sequence by the previous number, the ratio approaches 1.618. For example: 1597 ÷ 987 ≈ 1.618, 610 ÷ 377 ≈ 1.618.

And 1.618 is the legendary Golden Ratio, the proportion that maintains balance in the universe and is applied in financial markets.

Further derivations:

• Dividing a number by the next higher number yields approximately 0.618 (the reciprocal of 1.618), which forms the basis of the 61.8% retracement level.
• Dividing a number by a larger number two places ahead yields approximately 0.382, which forms the basis of the 38.2% retracement level.

Fibonacci Retracement: The Secret Weapon for Finding Support

What is a retracement level?

A retracement level is used to identify points where an asset’s price might pause or reverse after an upward or downward move. Common Fibonacci retracement percentages include: 23.6%, 38.2%, 50%, 61.8%, and 78.6%.

Practical Example: Precise Application on Gold Price

Suppose gold rises from $1681 to $1807.93, a gain of $126.93. Using these two prices, we draw Fibonacci retracement lines:

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

When the price pulls back to these levels, rebounds often occur, especially at the 61.8% level—which is often the strongest support.

How to trade using retracement?

In an uptrend:

1. Identify the lowest point A and the highest point B
2. Determine the potential retracement range (between 23.6% and 78.6%)
3. Place buy orders at retracement levels
4. Wait for a rebound to sell

In a downtrend:

1. Identify the highest point A and the lowest point B
2. Predict where the upward bounce might stop
3. Place sell orders at corresponding retracement levels
4. When the price reaches these levels and retreats

Traders often combine other technical indicators (like trendlines, candlestick patterns) to confirm whether these levels truly act as reversal points, increasing success rates.

Fibonacci Extension: A Tool for Predicting Target Prices

Extension vs. Retracement: The Core Difference

If retracement is used to find entry points, then extension is used to set profit targets. Extension levels are based on the key ratio 1.618, with common percentages being: 100%, 161.8%, 200%, 261.8%, and 423.6%.

Practical Application

In an uptrend:

1. Identify three points: X (low), A (high), B (a retracement level)
2. Enter a buy at B
3. Calculate the potential extension target (point C)
4. Set take-profit at C, and sell when the price reaches this level

In a downtrend:

1. Identify three points: X (high), A (low), B (a retracement level)
2. Enter a sell at B
3. Predict the extension target (point C)
4. Set take-profit at C and close the position when appropriate

The Complete Fibonacci Trading Process

1. Identify the trend direction → Determine if the market is rising or falling
2. Find key price points → Identify obvious highs and lows
3. Apply retracement levels → Find potential support or resistance levels
4. Set entry orders → Buy/sell at retracement levels
5. Use extension levels → Set profit targets
6. Confirm signals → Use other indicators to verify trading signals

Why Is Fibonacci So Effective in the Forex Market?

Market participants’ behaviors often follow the same psychological patterns. When most traders use Fibonacci levels, these levels become self-fulfilling prophecies—enough people buy or sell at these points, creating genuine support or resistance. That’s why the 61.8% level often proves to be the most reliable reversal point.

Fibonacci isn’t magic, but when combined with trend analysis, candlestick patterns, and risk management, it becomes a very powerful trading weapon.