Recently, while organizing my trading notes, I remembered the Fibonacci tools again. Actually, many people are both familiar and unfamiliar with this indicator; they know it's important but don't quite know how to use it. So I want to share my understanding.

The Fibonacci sequence, simply put, is a series of numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144… Each number is the sum of the previous two. It looks simple, but this sequence has magical applications in nature and financial markets.

Why is it so magical? Because when you divide a number in the sequence by the previous one, you find a pattern—the ratio approaches 1.618. For example, 1597 ÷ 987 ≈ 1.618, and 610 ÷ 377 ≈ 1.618. This 1.618 is the legendary Golden Ratio, also called the Golden Section. Conversely, dividing a number by the next one yields about 0.618, which is the reciprocal of 1.618. There's also the 0.382 ratio, which is derived from dividing a number by the third number after it. These ratios—1.618, 0.618, 0.382—form the foundation of the most powerful tools traders have.

In actual trading, Fibonacci retracement lines (also called Golden Ratio lines) are the most commonly used. They help identify support and resistance levels of an asset's price. For example, if gold rises from 1681 to 1807.93, you can draw retracement lines between these two points. Based on the Golden Ratio, the possible retracement levels are approximately: 23.6% at $1777.97, 38.2% at $1759.44, 50% at $1744.47, 61.8% at $1729.49, and 78.6% at $1708.16.

My personal method is this: after a significant price increase, when the market starts to pull back, I look for these Fibonacci levels from bottom to top. If the price bounces at the 61.8% level, it often becomes a support level, which could be a good entry point. Conversely, in a downtrend, I look from the top down, and these levels become resistance points. The key is to combine them with other technical indicators for confirmation—don't rely solely on Fibonacci.

There's also an advanced technique called Fibonacci extension, used to predict future target prices. If retracement lines help you find entry points, extension lines help you decide when to exit. Common extension levels are 100%, 161.8%, 200%, 261.8%. In an uptrend, you identify three key points (low, high, retracement), then set buy orders at the retracement, and the potential extension levels become your targets.

Honestly, the reason Fibonacci sequences are so popular in trading is because market participants are all using them. This creates a self-fulfilling prophecy—more orders placed at these levels make them more likely to become true support or resistance. So rather than seeing it as some mysterious natural law, it’s more like a collective psychological consensus among traders.

Finally, I recommend treating Fibonacci as an auxiliary tool, not a superstition. Use it together with trend analysis, candlestick patterns, and other indicators for better results. If you haven't tried it yet, practice on a demo account and experience how the Golden Ratio performs in different markets.