Recently, while studying technical analysis, I found that many traders are using the Fibonacci tool, but not many truly understand it. In fact, Fibonacci has become one of the mainstream technical analysis methods in the financial markets, worth spending time to understand deeply.

The core concept of Fibonacci is actually very simple. The characteristic of this sequence is that each number equals the sum of the previous two numbers, like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144… It may seem unremarkable, but when you start calculating the ratios between these numbers, something magical happens.

Dividing a number in the sequence by the previous one yields approximately 1.618. For example, 1597 divided by 987, or 610 divided by 377, both result in close to 1.618. This is the legendary Golden Ratio. Conversely, dividing a number by the following number gives 0.618, which is the reciprocal of 1.618. There’s also the 0.382 ratio, obtained by dividing a number by a number two places larger. These ratios—1.618, 0.618, 0.382—form the basis of the entire Fibonacci trading system.

So how exactly is Fibonacci used in trading? First is Fibonacci retracement. When an asset’s price rises sharply and then begins to fall back, traders use this tool to find support levels. For example, gold rises from 1681 to 1807.93, with a gain of 126.93. Multiplying this range by different Fibonacci ratios can calculate potential rebound points: 23.6% retracement at 1777.97, 38.2% at 1759.44, 50% at 1744.47, 61.8% at 1729.49, and 78.6% at 1708.16. Traders often place buy orders or stop-losses at these levels.

In an uptrend, you need to first identify the low point A and the high point B, then observe where the price retraces to which Fibonacci level. If the price finds support at the 61.8% level, it’s usually a good buying opportunity. Conversely, in a downtrend, traders look for resistance levels starting from the high point. Many combine Fibonacci with other technical indicators to strengthen confirmation signals.

Besides retracement, there’s Fibonacci extension, which is used to set target prices. If retracement helps you find entry points, extension helps you decide when to exit. In an uptrend, you need to identify three points: low point X, high point A, and a retracement level B. After buying at point B, you can use extension levels like 161.8%, 200%, 261.8% to predict potential future price targets.

Interestingly, these Fibonacci ratios can be seen everywhere in nature—from flower petals to shells to human proportions—following the golden ratio. Because of this, they also have remarkable accuracy in financial markets. Of course, no indicator is 100% accurate, so Fibonacci is best used together with trend analysis and price pattern methods. If you want to apply this tool in trading, it’s recommended to practice on a demo account first. Once you’re familiar with the actual effects of these levels, you can then use them in real trading.