From the Fibonacci Sequence to Trading Profits: The Hidden Code of the Forex Market

Why Are Traders Studying Fibonacci?

In the forex market, many professional traders use a seemingly simple yet powerful tool—the Fibonacci indicator. Its power lies in helping traders identify the most likely reversal points of an asset’s price, allowing for more precise entry and exit points. But why is this indicator so effective? The answer is hidden in an ancient mathematical secret.

Fibonacci Sequence: Mathematical Laws in Nature

The origin of the Fibonacci indicator comes from a mathematical sequence called the “Fibonacci sequence.” This sequence was first invented by an Indian mathematician, but it was introduced to the Western world in the 13th century by Italian mathematician Leonardo Pisano (nickname: Fibonacci), and has since been widely applied across various fields.

What is the Fibonacci sequence? Simply put, each number in this sequence is the sum of the two preceding numbers, extending infinitely:

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

The Golden Ratio: The Secret Hidden in the Fibonacci Sequence

The reason the Fibonacci sequence is revered in financial markets is because it contains a mysterious ratio known as the “Golden Ratio.”

When observing this sequence, a remarkable pattern emerges: any number in the sequence is approximately 1.618 times the previous number. For example:

• 1597 ÷ 987 ≈ 1.618
• 610 ÷ 377 ≈ 1.618

This number, 1.618, is called the Golden Ratio. It exists widely in the universe, from plant growth to human anatomy, and this ratio extends into financial market price movements.

Similar ratios include:

• 0.618 ratio: dividing a number by the next number in the sequence yields about 0.618 (the reciprocal of 1.618), forming the basis of the 61.8% Fibonacci retracement level.
• 0.382 ratio: dividing a number by the number two places ahead yields about 0.382, forming the basis of the 38.2% Fibonacci retracement level.

Fibonacci Retracement: Finding Support and Resistance Levels

Having understood the mathematical foundation of Fibonacci, let’s look at its practical application in trading—Fibonacci retracement lines.

What is Fibonacci Retracement?

Fibonacci Retracement is a tool used by traders to identify potential support and resistance levels of an asset’s price. Traders typically draw this line between two key price points (usually recent high and low).

Standard Fibonacci retracement levels include:

• 23.6%
• 38.2%
• 50%
• 61.8%
• 78.6%

These percentages represent critical zones where the price may pause or reverse.

Practical Example: Fibonacci Application on Gold Price

Suppose gold rises from $1681 to $1807.93, a gain of $126.93. Traders can draw Fibonacci retracement levels between these two prices. Based on calculations, the retracement levels are:

• 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

In actual trading, when gold’s price retraces to these levels, traders observe whether the market shows signs of bouncing, which could indicate a potential buying opportunity.

How to Use Fibonacci Retracement for Trading?

In an uptrend: When an asset’s price rises sharply and begins to retrace, traders identify the bottom (Point A) and recent high (Point B), then draw Fibonacci retracement lines between these points. These levels may act as support, and traders can place buy orders near these levels.

In a downtrend: When a price drops sharply and starts to rebound, traders identify the recent high (Point A) and low (Point B), draw the retracement lines, and look for resistance levels. If the price encounters resistance at a Fibonacci level and continues downward, traders can set sell orders.

Practical tip: Successful traders often combine Fibonacci retracement with other technical analysis tools (like moving averages, RSI, etc.) or chart patterns to confirm whether the price is likely to reverse at a Fibonacci level, greatly increasing the probability of successful trades.

Fibonacci Extension: Predicting Price Targets

If Fibonacci retracement helps traders find entry points, Fibonacci extension is used to determine exit points.

What is Fibonacci Extension?

Fibonacci Extension is a tool used by traders to forecast potential target levels where the price might reach after a retracement. It helps traders decide when to take profits.

Common Fibonacci extension levels include:

• 100%
• 161.8% (based on the 1.618 ratio)
• 200%
• 261.8%
• 323.6%

How to Use Fibonacci Extension in Trading?

In an uptrend:

1. Identify three key points: X (low point), A (high point), B (a Fibonacci retracement level)
2. Place a buy order at B
3. Calculate the potential extension target © based on the B point
4. When the price reaches C, traders can partially or fully close positions to realize profits

In a downtrend:

1. Identify three key points: X (high point), A (low point), B (retracement level)
2. Place a sell order at B
3. Find the extension target downward from B
4. Close at the C point (extension level)

Core Points of Fibonacci Trading

To summarize the complete application process of Fibonacci in forex trading:

Entry phase: Use Fibonacci retracement to find support and resistance levels, and identify suitable entry points. When the price retraces to a key Fibonacci level and shows reversal signals, consider opening a position.

Management phase: Set stop-loss orders outside the Fibonacci retracement lines to prevent losses if the price breaks support or resistance.

Exit phase: Use Fibonacci extension levels to set profit targets. When the price moves in the expected direction and reaches the extension level, consider closing the position.

Risk warning: Fibonacci is just one of many technical analysis tools and should not be used as the sole basis for trading decisions. Markets contain many unpredictable variables; traders should combine other indicators, fundamental analysis, and strict risk management to develop their strategies.