Fibonacci trading is a powerful tool used by forex traders to predict potential support, resistance, and profit-taking levels in the market. Rooted in a sequence of numbers discovered by a legendary mathematician, Fibonacci trading strategies offer deep insights into price movements and trends.
In this guide, we’ll break down the basics of Fibonacci trading and show you how to use Fibonacci retracement and extension levels to your advantage.
Who Was Fibonacci?
Leonardo Fibonacci was a famous Italian mathematician who introduced the world to a unique sequence of numbers that surprisingly describes natural patterns in everything from nature to financial markets.
This sequence looks like:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…
Each number is the sum of the two before it. From this, certain ratios are derived—most importantly:
- 0.236
- 0.382
- 0.618 (The Golden Ratio)
- 0.764
- 1.000
- 1.382
- 1.618
These ratios play a key role in identifying entry, exit, and reversal zones in trading.
What is the Fibonacci Retracement?
Fibonacci retracement levels are used to predict where price might retrace to before continuing in the original direction.
After a strong upward or downward move, traders expect price to pull back temporarily before resuming the trend. Fibonacci retracement levels help you find potential areas where this retracement could stop.
Key Fibonacci Retracement Levels:
- 23.6%
- 38.2%
- 61.8%
- 76.4%
These act as support or resistance levels. Because many traders watch and trade around these levels, they tend to create self-fulfilling price reactions.
What is the Fibonacci Extension?
Fibonacci extension levels are used to identify where the price may go after a retracement has ended—helping traders set realistic profit targets.
Key Fibonacci Extension Levels:
- 38.2%
- 61.8%
- 100%
- 138.2%
- 161.8%
Again, due to their popularity, these levels often result in price reactions—making them helpful for planning exits or setting stop-loss levels.
How to Use Fibonacci in Forex Trading
To use Fibonacci tools effectively, you must first identify:
- Swing High – a candlestick with at least two lower highs to its left and right.
- Swing Low – a candlestick with at least two higher lows to its left and right.
Applying Fibonacci Retracement:
- For a bullish move: draw from Swing Low to Swing High
- For a bearish move: draw from Swing High to Swing Low
The software will automatically place the key retracement levels on your chart.
Applying Fibonacci Extension:
Once the retracement is done, use extension tools to forecast take profit targets beyond the last swing point.
Why Fibonacci Levels Work
Fibonacci levels work because many traders believe in them. This mass belief causes a surge in buying or selling pressure near these levels—making them self-fulfilling prophecies in many cases.
Final Thoughts: Should You Use Fibonacci in Forex?
Absolutely! Fibonacci retracements and extensions offer a strategic edge when used properly—especially when combined with price action, support/resistance, or candlestick patterns.
But remember: Fibonacci tools work best when used with confirmation—never in isolation.
🔍 Want to Learn More?
Stay tuned on www.dailyforex.pk for our upcoming guides on:
- How to Trade Fibonacci Retracement Like a Pro
- Combining Fibonacci With Support and Resistance
- Top 3 Fibonacci Strategies for Beginners
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