Fibonacci is a tool that many people have heard of but may not really know how to use effectively. I’ve been using it for many years, and I’ll say clearly that if you set Fibonacci correctly, it can greatly assist your trading.

In fact, Fibonacci comes from a sequence of numbers connected to each other: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89... Each number is the sum of the two previous numbers. It’s very simple, but the magic lies in the ratios that emerge from this sequence, which appear throughout nature—from seashells and sunflower patterns to stock price charts.

Indian mathematicians discovered these ratios over 400–200 years before Christ. Although the name “Fibonacci” was assigned in medieval Europe when artists and designers began using this golden ratio to create beautiful works, it was later adopted in trading to predict prices.

Calculating these ratios is straightforward: for example, dividing 34 by 55 gives approximately 0.618, and dividing 377 by 233 gives about 1.618. These values have become key ratios in Fibonacci tools used in trading.

There are five main tools you need to know for application:

First, Fibonacci Retracement is used to find entry points when prices pull back. You draw a line from the lowest point to the highest point, and the retracement levels at 23.6%, 38.2%, 50%, and 61.8% often serve as support and resistance zones. If Fibonacci retracement is set correctly, these levels often act as real support and resistance.

Second, Fibonacci Extension is used to identify target prices when the price breaks through resistance. This tool indicates that the price may reach levels like 113.6%, 127.2%, 161.8%, etc.

Third, Fibonacci Projection combines both Retracement and Extension. Fibonacci Timezone uses Fibonacci numbers along the vertical axis to predict when price reversals might occur, and Fibonacci Fans draw angled lines to find support and resistance while considering time.

The simplest way to use these is in an uptrend: when the price pulls back, use Fibonacci Retracement from the low to the high, then buy at support levels of 23.6%, 38.2%, or 50%. In a downtrend, do the opposite.

When the price breaks out upward, use Fibonacci Extension to target profit levels, selling at 113.6% or 161.8% levels and beyond.

For range trading, draw Fibonacci Retracement connecting the high and low, then buy at support and sell at resistance.

The advantage of this tool is that it’s easy to use and interpret, and it can be combined with other tools. The downside is that it’s somewhat subjective—some traders profit from it, others lose. Relying on Fibonacci alone may not be sufficiently accurate.

Therefore, I often combine it with other tools, such as EMA to identify trend direction first, then use Fibonacci to find support and resistance, or with RSI to confirm signals, or with Price Action to observe candlestick patterns confirming support and resistance.

For example, in trading AUD/USD on a 15-minute chart, I observe the price moving below the EMA(50), indicating a downtrend. Then I use Fibonacci Retracement from point A to point B, wait for the price to rebound, and enter short at 23.6%, 38.2%, or 50% retracement levels, aiming to close the position at the Fibonacci 0% support.

Setting Fibonacci on your trading platform is very easy: click the tool icon, select Fibonacci Retracement, draw from the desired points, then adjust the Fibonacci levels as needed.

The truth is, Fibonacci works well in practice. Although prices constantly change, this tool remains useful because Fibonacci ratios are widely used worldwide. Most traders believe that support and resistance levels derived from these ratios are significant, making Fibonacci a reliable tool.

In summary, Fibonacci isn’t a magic tool, but if you set it correctly and combine it with other indicators, it can genuinely improve your trading performance. Try opening charts and experimenting—you’ll gain a clearer understanding.