Recently organizing trading notes, I suddenly remembered the classic indicator Fibonacci and found that many beginners still have misunderstandings about it.

The Fibonacci sequence sounds complicated, but it’s actually a series of magical numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144… each number is the sum of the previous two. Interestingly, when you divide a number in the sequence by the previous one, you keep getting approximately 1.618. For example, 1597 divided by 987, or 610 divided by 377, both roughly equal 1.618. This is the legendary Golden Ratio, which is everywhere in nature, and also in financial markets.

Therefore, the Fibonacci trading indicator is derived from this Golden Ratio. Traders use it to find support and resistance levels, and to judge where prices might reverse. That’s why Fibonacci is so popular in the forex market.

Speaking of practical applications, Fibonacci retracement levels are what I use most frequently. They allow you to draw horizontal lines between any two price points, usually a high and a low. The percentage levels—23.6%, 38.2%, 50%, 61.8%, and 78.6%—are zones where the asset’s price might stall or reverse.

For example, suppose gold rises from 1681 to 1807.93. You can draw Fibonacci retracement lines between these two points. The retracement levels would be: 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. When the price falls back to one of these levels, such as 61.8%, traders can see it as a potential support level and place buy orders there.

There are two main ways to use Fibonacci retracement. One is after a significant upward move, to find potential pullback points from the bottom; the other is after a significant downward move, to identify possible retracement points from the top. I usually combine Fibonacci retracement with other technical indicators or trend patterns to strengthen confirmation signals.

Besides retracement, there’s also Fibonacci extension, which is used to set target prices or predict future touchpoints. If retracement helps confirm your entry point, extension helps decide when to exit. Common Fibonacci extension levels include 100%, 161.8%, 200%, 261.8%, and 423.6%.

In an uptrend, you need to identify three key points: X (low), A (high), and B (a retracement level). Once confirmed, you can place buy orders at B, then use extension levels to find potential target zones. The logic is similar in a downtrend, just in the opposite direction.

Honestly, Fibonacci tools do have their value, but they’re not foolproof. The most important thing is to combine them with actual market trends and your trading strategy. Sometimes they give good signals, sometimes they deceive you. So, continuous practice in real trading is essential to truly master this skill.