If you have some understanding of the financial markets, you may have heard of the concept of Fibonacci, which is a star in the field of forex trading. The Fibonacci indicator, simply put, is based on a magical mathematical sequence called the Fibonacci sequence. In this sequence, each number is the sum of the two preceding numbers, continually iterating. For example: 0, 1, 1, 2, 3, 5, 8, 13... Interestingly, the ratio of the numbers in the sequence to the preceding numbers approaches 1.618, known as the golden ratio. These ratios are said to be ubiquitous, from the vastness of the universe to the minutiae of the financial markets, demonstrating their magical nature.

The Fibonacci ratio was discovered by Indian mathematicians, but it was the Italian mathematician Fibonacci (real name Leonardo Pisano) who first brought it into the Western view. Traders use these ratios to predict potential price changes and reversals. Let's first understand this sequence and how it is applied in trading strategies.

Let’s take a look at the Fibonacci sequence. Through this sequence, you will find that each number is approximately 1.618 times the previous number. If you divide one number by the next number, for example, 144 divided by 233, you will get 0.618, which is also an important Fibonacci ratio. Conversely, these ratios form the basis of the Fibonacci retracement lines that traders focus on.

Fibonacci retracement lines are typically used to identify potential support and resistance levels for asset prices. Suppose you see the EUR/USD retracting from a high point; this fluctuation may correspond to a particular Fibonacci percentage—such as the 23.6% retracement in the example above.

A common example is if the price of gold rises from a low of $1681 to a high of $1807.93, this range can help us draw several Fibonacci retracement levels. This allows us to predict that the price may pull back to these levels. In trading, Fibonacci retracements are used to confirm entry points and help set stop-loss and target prices.

In addition to pullbacks, traders also use Fibonacci extensions. In simple terms, Fibonacci extensions are used to predict higher price targets that the price may reach, and even to determine when to exit a trade. Traders often utilize Fibonacci extensions to find the market direction after a price retracement.

In trading, it is common to combine other technical analysis tools to better confirm level positions, making trades more secure. This allows traders to have wiser trading plans when the market pulls back. Finally, whether using Fibonacci retracement or extension, this method is very popular in market analysis. I hope this helps with your trading! What do you think? Have you ever used Fibonacci ratios in your trading? Feel free to leave a message and chat!