Master the Fibonacci sequence: Decoding the golden code of the foreign exchange market

From Numerical Series to Trading Tools

The Fibonacci sequence is widely used in the forex market. This mathematical system, originating from 13th-century Italian mathematician Leonardo Pisano (pen name: Fibonacci), has become one of the most practical tools in technical analysis. Many traders utilize this method to predict turning points in asset prices.

The core of Fibonacci is a simple yet magical number sequence: each number is the sum of the two preceding ones. The sequence is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765…

This sequence may seem ordinary, but it hides market secrets. When observing the ratios between adjacent numbers in the sequence, an astonishing pattern emerges: any number is approximately 1.618 times the previous number. For example, 1597 divided by 987 is about 1.618, and 610 divided by 377 is also approximately 1.618. This 1.618 is the legendary Golden Ratio, regarded as the code for harmony in the universe.

Three Core Ratios Derived from the Golden Ratio

Based on the Fibonacci sequence, three key ratios have been derived in the trading market.

61.8% Ratio comes from the reciprocal of 0.618. When dividing a number in the sequence by the next number (e.g., 144 divided by 233, or 610 divided by 987), the result is approximately 0.618. This coefficient forms the theoretical basis for market retracement support.

38.2% Ratio originates from another mathematical relationship. If you divide a number by a number two places larger (e.g., 55 divided by 89, or 377 divided by 987), the result is about 0.382, which is the mathematical source of the 38.2% retracement level.

50% Ratio is not a strict Fibonacci-derived value but is often regarded as a technical midpoint in practical trading, used to assess the equilibrium position of price movements.

These ratios provide important reference points when asset prices face turning points, helping traders identify potential reversal zones.

Retracement Levels: Finding the Golden Entry Points

Fibonacci retracement levels (also called golden ratios) are tools used by technical analysts to identify support and resistance levels. Traders simply draw this line between any two price points (usually prominent high and low points), and the system automatically generates five key levels: 23.6%, 38.2%, 50%, 61.8%, and 78.6%.

Taking gold prices as an example: suppose the price rises from $1681 to $1807.93, an increase of $126.93. Based on Fibonacci retracement principles, we can calculate potential support levels:

• 23.6% retracement at $1777.97
• 38.2% retracement at $1759.44
• 50% retracement at $1744.47
• 61.8% retracement at $1729.49
• 78.6% retracement at $1708.16

When the price pulls back after rising, traders observe whether the price stops declining at these levels. Often, the price bounces upward at the 61.8% or 38.2% levels, which are the buy signals traders look for. Conversely, in a downtrend, these levels may act as resistance, preventing further price increases.

Dual Application Logic in Price Trends

In an Uptrend: After a significant rise, traders start from the bottom, drawing retracement lines from the low to the high. If the price begins to decline, they place buy orders at the 23.6%, 38.2%, or 61.8% levels. When the price stabilizes at a Fibonacci level, it often indicates the continuation of the uptrend.

In a Downtrend: After a sharp decline, traders start from the top, identifying retracement from high to low. If the price rebounds, these Fibonacci levels become resistance points. Traders may set sell orders when the price hits the 61.8% or 38.2% levels.

Many professional traders combine Fibonacci retracement with other technical indicators (such as moving averages, RSI) to improve signal reliability.

Extension Levels: Precisely Forecasting Target Prices

If retracement levels help traders find entry points, Fibonacci extension levels are tools used to determine exit points. Extension levels are typically based on the key coefficient 1.618, deriving target levels like 161.8%, 200%, 261.8%, and 423.6%.

In an uptrend, traders identify three points: X (initial low), A (subsequent high), and B (price retracement to a Fibonacci level). Once these points are confirmed, traders can place buy orders at B, expecting the price to rise toward C (a Fibonacci extension level), serving as a profit target.

In a downtrend, the logic is reversed: X is the previous high, A is the subsequent low, and B is the retracement to a Fibonacci level. Traders place sell orders at B, aiming for the price to fall toward C (a Fibonacci extension level) as the target.

Complete Trading Decision Framework

The value of Fibonacci tools lies in providing a systematic decision-making framework. Traders first use retracement levels to confirm support and resistance zones, helping them enter trades in reasonable areas. Then, extension levels indicate logical profit target zones, guiding when to consider exiting.

This approach is widely used in the forex market because it combines mathematical principles with market psychology. Since many traders use Fibonacci levels, these price points often become self-fulfilling prophecies—large numbers of orders at these levels can actually drive price reversals.

Whether beginners or seasoned investors, understanding and mastering the application of the Fibonacci sequence can significantly enhance the accuracy of technical analysis.