Advanced Forex Trading Tips: Master Fibonacci Retracement to Understand Market Turning Points

Why Are Traders Using Fibonacci?

In the forex market, there are many technical analysis methods, but when it comes to applying the golden ratio, the name Fibonacci cannot be ignored. This 13th-century Italian mathematician Leonardo Pisano introduced a series of fascinating numbers originating from India into the West, which has since become one of the most practical tools for price prediction among traders.

Simply put, the core of Fibonacci trading indicators is the golden ratio—a proportion believed to describe the balance of all things in the universe. This ratio is not only widespread in nature but also profoundly influences the fluctuation patterns of financial markets. Traders often use Fibonacci indicators to identify potential reversal zones in asset prices, which is why they are highly regarded in forex trading.

Where Do Fibonacci Ratios Come From?

To understand how Fibonacci ratios are applied in trading, first understand their mathematical foundation.

【Resource Reference: Babypips】

The Fibonacci sequence may seem complex, but it’s actually quite simple: each number is the sum of the two preceding ones, extending infinitely. Specifically:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765…

Observing this sequence reveals a pattern: any number is approximately 1.618 times the previous number. For example, 1597 ÷ 987 ≈ 1.618, 610 ÷ 377 ≈ 1.618. This 1.618 is the key golden ratio in Fibonacci ratios.

Conversely, dividing a number by the next number yields about 0.618 (the reciprocal of 1.618). For example, 144 ÷ 233 ≈ 0.618, 610 ÷ 987 ≈ 0.618. This 0.618 forms the theoretical basis for the 61.8% Fibonacci retracement level.

Going further: dividing a number by the number two places ahead yields approximately 0.382, such as 55 ÷ 89 ≈ 0.382, 377 ÷ 987 ≈ 0.382. Therefore, 0.382 is the source of the 38.2% Fibonacci retracement level.

Thus, the commonly seen Fibonacci ratios of 1.618, 0.618, and 0.382 in trading are naturally derived from this sequence. They provide reference points at market turning points.

Fibonacci Retracement: A Powerful Tool for Finding Support and Resistance

After understanding the mathematical principles, the real challenge is—how to use it to make money?

What is a retracement level?

Fibonacci retracement lines (also called golden ratio lines) help traders quickly identify support and resistance levels of asset prices. The simple method is to draw retracement lines between any two price points (usually a high and a low).

Key percentage levels include: 23.6%, 38.2%, 50%, 61.8%, and 78.6%, which are often areas where prices pause or reverse.

For example: EUR/USD rises to 1.5 and then drops 0.354, indicating a 23.6% retracement—a typical Fibonacci feature.

Practical example: How to interpret gold prices?

Suppose gold rises from $1681 to $1807.93. Using these two points, you can draw the complete retracement levels:

• 23.6% level: $1777.97 ($1807.93 - $126.93×0.236)
• 38.2% level: $1759.44 ($1807.93 - $126.93×0.382)
• 50% level: $1744.47 ($1807.93 - $126.93×0.5)
• 61.8% level: $1729.49 ($1807.93 - $126.93×0.618)
• 78.6% level: $1708.16 ($1807.93 - $126.93×0.786)

These levels serve as reference points for traders—used to set buy/sell orders, stop-loss levels, or target prices.

Two classic scenarios

Scenario 1: Finding support during an uptrend

When an asset’s price rises sharply and then begins to pull back, traders measure the retracement from the bottom (Point A) to the high (Point B). The zones where the price might pause before bouncing back are the Fibonacci retracement levels: 23.6%, 38.2%, 50%, 61.8%, 78.6%. If the price hits one of these levels, such as 61.8%, traders may place buy orders there, as these levels often act as strong support.

Scenario 2: Finding resistance during a downtrend

When the price drops sharply from a high point (Point A) to a low point (Point B), traders look for potential rebound levels. These rebound points correspond to the same Fibonacci percentage levels. If the price encounters resistance at a level, it may continue downward.

Tip: Professional traders usually do not rely solely on Fibonacci indicators but combine them with other technical tools (like moving averages, RSI) or pattern analysis to confirm reversal points.

Fibonacci Extensions: The Other Piece of the Puzzle for Price Targets

If retracements help you find entry points, extensions help you decide when to exit.

What are extensions?

Fibonacci extensions are used to set exit targets or predict new highs after a retracement. Remember that key Fibonacci ratio 1.618? The 161.8% extension level is based on this.

Other common extension percentages include: 100%, 200%, 261.8%, 423.6%.

How to profit from extensions?

In an uptrend, traders need to identify three price points:

• X point: the low (starting point)
• A point: the high (peak)
• B point: a Fibonacci retracement level (support after pullback)

After confirming these points, traders place buy orders at B. As the price moves upward from B, they can use extension levels (161.8%, 261.8%, etc.) to forecast potential target prices. When the price reaches point C (a certain extension level), it’s time to consider taking profits.

In a downtrend, the logic is reversed:

• X point: high point
• A point: low point
• B point: Fibonacci retracement level

Set sell orders at B, then use extension levels to predict downward targets.

Retracement vs Extension: How Do They Work Together?

In summary, each tool has its role:

• Fibonacci retracement: helps you find entry points and stop-loss levels—when the price retraces to a certain level, a reversal signal may appear.
• Fibonacci extension: helps you set profit targets—after breaking previous highs, it forecasts potential new price areas.

In other words, retracement is “I buy here,” extension is “I sell there.” Combining both creates a complete trading plan.

Final Reminder

Although Fibonacci ratios perform well in markets, remember: no indicator can predict the market 100%. Fibonacci is just a probabilistic reference zone; actual trading decisions should also consider market environment, risk management, and other technical indicators. Especially in high volatility, support and resistance levels may be broken, so strict stop-loss placement is essential.

Mastering Fibonacci retracement and extension tools gives you two of the most classic weapons in technical analysis. In the forex market, traders who understand charts and Fibonacci ratios are often better at capturing market turning points.