Recently, while studying forex trading, I found that many people are using the Fibonacci tool, but not many truly understand it. Today, let's talk about what this classic indicator is all about.

Fibonacci ratios are especially popular in financial markets, essentially based on an ancient mathematical rule. In the 13th century, Italian mathematician Leonardo Pisano introduced this ratio to the West, and people started calling it Fibonacci. The principle is simple—a sequence of numbers where each number is the sum of the two preceding ones: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144... and so on.

The interesting part is that when you divide a number in the sequence by the previous one, the ratio always approaches 1.618. For example, 1597 ÷ 987 ≈ 1.618, and 610 ÷ 377 ≈ 1.618. This 1.618 is the legendary Golden Ratio, found in nature and markets alike. Conversely, dividing a number by the next one yields 0.618, which is the basis for the 61.8% retracement level. Similarly, 0.382 corresponds to the 38.2% retracement level.

How do traders use this? Suppose gold prices rise from 1681 to 1807.93; you can draw Fibonacci retracement lines. Based on different percentage levels, you can identify potential support and resistance levels. For example, 23.6% retraces to $1777.97, 38.2% to $1759.44, and 61.8% to $1729.49. These points are where traders might enter or set stop-loss orders.

In actual trading, Fibonacci retracement helps confirm entry points. When the price is in an uptrend and pulls back to a Fibonacci level, such as 61.8%, you can view that as support and place a buy order. Conversely, in a downtrend, these levels can act as resistance.

Besides retracements, Fibonacci extensions are also used. If retracements are for finding entry points, extensions are for setting target prices and exit points. Levels like 100%, 161.8%, 200%, 261.8% help predict where the price might reach. In an uptrend, you identify low point X, high point A, and retracement point B, then set buy orders from B, looking to see how high the price can go to the extension levels. The logic is reversed in a downtrend.

Honestly, relying solely on Fibonacci indicators isn't enough; most traders combine them with other technical analysis tools or trend patterns for confirmation. This method has been proven over many years, and understanding Fibonacci's logic is helpful for forex trading.