The Secret of Fibonacci Retracement in the Forex Market: Mastering Fibonacci Sequence Trading Rules

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In forex trading, a set of mathematical patterns derived from nature is widely used — this is the Fibonacci sequence-based trading indicator. This method is popular because it helps traders accurately identify potential reversal points in asset prices.

The name Fibonacci comes from 13th-century Italian mathematician Leonardo Pisano, who introduced the golden ratio to the Western world. The concept of the golden ratio has existed in the universe — from plant spirals to galaxy structures, this ratio is everywhere. The financial markets are no exception; traders have found that the golden ratio also applies to price fluctuation patterns.

Mathematical Foundation of the Fibonacci Sequence

To understand its application in trading, one must first grasp the Fibonacci sequence itself. The magic of this sequence lies in: each number is the sum of the two preceding numbers.

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

Observing this sequence reveals an astonishing pattern: any number divided by its previous number approaches 1.618. For example, 1597 ÷ 987 ≈ 1.618, 610 ÷ 377 ≈ 1.618. This 1.618 is the legendary golden ratio.

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

Another important ratio is approximately 0.382, obtained by dividing a number by the number two places higher. For example, 55 ÷ 89 ≈ 0.382, 377 ÷ 987 ≈ 0.382. Therefore, 38.2% Fibonacci retracement is derived from this.

Core ratios summarized:

• 1.618 (Golden Ratio)
• 0.618 (61.8% retracement level)
• 0.382 (38.2% retracement level)

These numbers guide traders when prices show reversal signals.

Fibonacci Retracement: A Powerful Tool for Finding Entry and Exit Points

What is a retracement level?

Fibonacci retracement lines help traders identify potential support and resistance levels in asset prices. By drawing these lines between any two points (usually a high and a low), traders can recognize areas where prices might pause or reverse.

Standard Fibonacci retracement percentages are: 23.6%, 38.2%, 50%, 61.8%, 78.6%. These levels represent key resistance points during a price correction.

For example: EUR/USD rises to 1.5, then drops by 0.354, indicating a 23.6% retracement — demonstrating the power of Fibonacci levels.

Practical Example: Calculating Gold Price Retracement

Suppose gold rises from $1681 to $1807.93. You can draw Fibonacci retracement lines between these two points:

Price increase = 1807.93 - 1681 = $126.93

Specific retracement levels:

Application of Retracement Levels in Trading

When an asset’s price rises and then begins to fall, traders can use Fibonacci retracement to determine entry points, stop-loss levels, and profit targets.

In an uptrend: After a significant rise, if a correction occurs, traders identify points A (low) and B (high). If the price finds support at the 61.8% retracement level, traders may place buy orders there. Other levels (23.6%, 38.2%, 50%) may also act as support.

In a downtrend: After a sharp decline and rebound, traders identify points A (high) and B (low). When the price bounces from the low point, Fibonacci levels become potential resistance points. Traders may consider placing sell orders at these levels.

Practical advice: Do not rely solely on Fibonacci retracement. The most effective approach is to combine it with other technical indicators or trend patterns to confirm the reliability of reversals.

Fibonacci Extension: A Tool for Predicting Price Targets

Concept of Extension Levels

If Fibonacci retracement helps traders find entry points, Fibonacci extension levels are used to predict exit points.

Extension levels are based on the core number 1.618, from which other ratios are derived:

• 100%
• 161.8%
• 200%
• 261.8%
• 423.6%

These levels are used to forecast potential target prices after a breakout beyond the retracement.

Practical Use of Extension Indicators

In an uptrend:

Traders need to identify three key points:

• X point: low price
• A point: high price
• B point: any Fibonacci retracement level

After confirming these points, traders place buy orders at B, then use Fibonacci extension ratios (like 161.8%) to project the target at point C. When the price reaches C, traders can consider closing positions for profit.

In a downtrend:

The logic is reversed — X becomes high, A becomes low, B remains a retracement level. Traders place sell orders at B, using extension ratios to find potential target levels for exiting trades.

Summary: The Complete Fibonacci Trading Framework

Fibonacci sequence applications in forex are divided into two levels:

Step 1: Confirm entries with retracement

• Identify uptrends or downtrends
• Draw retracement lines between high and low points
• Place orders at key support/resistance levels

Step 2: Use extensions to determine profits

• Set extension levels based on three points
• Forecast potential target prices
• Close or partially take profit at extension levels

The brilliance of this method lies in combining mathematical patterns with market psychology. Whether trading gold, currency pairs, or other assets, Fibonacci sequence provides an objective decision-making framework to help traders find order amid market volatility.