What is Fibonacci, and how to use it for trading and making profits

Modern traders who are interested in trading have probably heard of “Fibonacci” before, but do they truly understand what it is? This article will take you deep into the most widely used tool in the market and reveal that it’s not as complicated as you might think.

What is Fibonacci? A Simple Explanation in Minutes

Fibonacci is a significant sequence of numbers found in nature and trading

This sequence includes 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987… The simple rule is that each number equals the sum of the two preceding ones (1+1=2, 1+2=3, 2+3=5, and so on)

The magic of Fibonacci lies in its presence everywhere in the universe — in shells, leaves, sunflowers, and even in famous paintings like the Mona Lisa. The golden ratio (Golden Ratio) derived from Fibonacci is hidden all around us.

Traders use Fibonacci because they believe it follows market laws. Asset prices do not move randomly but have hidden patterns, and Fibonacci helps us see those patterns.

Fibonacci Numbers Have Been Around for 2,500 Years

Although named after the Italian mathematician Leonardo Fibonacci of the Middle Ages, this number sequence was discovered between 400 and 200 BC by Indian mathematicians. Later, it was introduced into Italian universities and spread throughout Europe.

In art and design, Fibonacci has been used since the Renaissance because it creates balance and beauty. Later, it was adapted into financial markets as a tool to identify support and resistance levels.

Calculating Fibonacci Is Easier Than You Think

Add the two previous numbers!

• 0 + 1 = 1
• 1 + 1 = 2
• 1 + 2 = 3
• 2 + 3 = 5
• 3 + 5 = 8
• 5 + 8 = 13
• And so on…

The fascinating part is that dividing these numbers yields constant ratios:

• Front ÷ Back = 0.618 (Always, e.g., 34 ÷ 55 = 0.618)
• Back ÷ Front = 1.618 (Always, e.g., 233 ÷ 144 = 1.618)
• Front ÷ Number two places ahead = 0.382 (e.g., 89 ÷ 233 = 0.382)

When these ratios appear in trading!

5 Fibonacci Tools You Must Know

1. Fibonacci Retracement - Used to find buy points

When the price moves up, it often pulls back for a while (Pullback). This tool helps predict how far it might retrace.

Draw the tool connecting the lowest point to the highest point — the system will generate horizontal lines at 0%, 23.6%, 38.2%, 50%, 61.8%, 100%, and additional lines at 0.236, 0.382, 0.5, 0.618, 0.786.

In an uptrend: Use these lines as support (Support). When the price retraces and breaks below a line, prepare to buy.

In a downtrend: Use these lines as resistance (Resistance). When the price bounces up and hits a line, prepare to sell.

2. Fibonacci Extension - Used to find target points

Unlike Retracement, which finds pullback levels, Extension predicts how far the price will go when it breaks out.

Levels provided: 113.6%, 127.2%, 141.4%, 161.8%, 200%, 261.8%.

How to use: After the price breaks out, calculate the extension based on these ratios — which level is the most suitable target?

3. Fibonacci Projection - Combines Retracement + Extension

This tool works both ways, connecting 3 points: retracement point, high, and low, to generate both support and resistance levels.

4. Fibonacci Timezone - Finds reversal periods

Not price, but time — uses numbers 13, 21, 34, 55, 89, 144, 233… Vertical lines indicate periods when the price is likely to change direction.

5. Fibonacci Fans - Uses both price and time

Creates diagonal lines based on Fibonacci ratios crossing support and resistance levels. Many traders like it because it provides both time and price insights.

How to Use Fibonacci in Real Life

Scenario 1: Buy on pullback (Pullback)

1. Wait for a clear uptrend (Higher Lows)
2. When the price retraces, draw Fibonacci Retracement from the previous low to high
3. When the price approaches Fibo 23.6% or 38.2%, buy
4. Exit near Fibo 0% (Previous high) or Fibo 61.8%

Scenario 2: Sell on breakout (Breakout)

1. Identify Swing High and Swing Low before the breakout
2. When the price breaks out, draw Fibonacci Extension
3. Take profit (Take Profit) at levels 161.8% or 200%

Scenario 3: Trade within a range (Range-bound)

Use Fibonacci Retracement at the high-low points of the range. Buy near support, sell near resistance.

Fibonacci + Signal Tools for Greater Accuracy

Using Fibonacci alone can be risky; confirmation is necessary:

Fibonacci + EMA (Exponential Moving Average)

• Use EMA(50) to identify the main trend
• Use Fibonacci Retracement to find entry points
• Enter on pullback when the price is above EMA(50)

Example: AUD/USD price moves above EMA(50). When it dips, draw Fibonacci Retracement from the low to high of that wave. Expect a bounce at 38.2%. If it bounces, buy.

Fibonacci + RSI (Relative Strength Index)

• Use Extension to find target prices
• Use RSI to gauge momentum weakening
• When the price hits the target and RSI exceeds 70 (Overbought), prepare to sell
• Negative divergence in RSI signals strong sell signals

Fibonacci + Price Action

Not indicators, but candlestick patterns:

• Draw Fibonacci Retracement
• When the price hits a Fibonacci level and forms reversal patterns (Doji, Engulfing), trade accordingly
• Confirm with a breakout of the candlestick range

Advantages and Limitations of Fibonacci

Advantages:

• Easy to use - Not complicated, just draw lines and trade
• Universal - Works with Forex, Crypto, stocks, all markets
• Trusted - Used by retail traders and big funds alike; prices often hover around Fibonacci levels
• Psychological basis - Many traders believe Fibonacci levels act as support and resistance, so everyone tends to think the same

Limitations:

• Not a magic wand - Sometimes prices pierce through Fibonacci levels without bouncing
• Subjective points - The choice of low-high points affects the results
• Must be combined with other tools - Fibonacci alone can mislead; always confirm with other indicators or price action

How to Set Up Fibonacci on Trading Platforms

1. Click the drawing tool icon → select “Fibonacci Retracement” (or other Fibonacci tools)
2. Drag from the low point to the high point (or vice versa)
3. The system will draw horizontal lines
4. Click on the tool → “Settings” to adjust Fibonacci levels as needed

FAQ

Does Fibonacci really work?

Yes, often when the price touches Fibonacci levels, it bounces back because many traders are watching the same levels, creating natural support/resistance.

Which Fibonacci levels are most reliable?

Standard levels: 38.2%, 50%, 61.8%. Test these 2-3 levels for effectiveness.

Which timeframe is best for Fibonacci?

All timeframes work, but it’s most effective on 15-minute, hourly, or daily charts.

Is there a “100%” safe combination with Fibonacci?

No, there’s no 100% guaranteed method. The best approach combines Fibonacci with EMA, Price Action, and proper risk management.

Summary

Fibonacci is a significant sequence of numbers hidden in nature and markets. Traders use it to identify support, resistance, and target prices. It’s not a magical wand but a way to see the proportions in price movements.

Successful Fibonacci traders don’t rely on it alone but combine it with other tools, good risk management, and emotional discipline.

Try opening your trading platform, drawing Fibonacci on a real chart, and observe whether the price truly bounces at those levels — that will teach you more about Fibonacci than reading a thousand words.