How to Use Fibonacci in Trading: A Complete Guide for Finding Entry and Exit Points

If you’ve ever asked yourself, “Why do playful traders feel confident in their trading decisions?” the answer might lie in a tool that has been used worldwide for centuries — the Fibonacci series, a mysterious sequence of numbers hidden in nature, art, and even price movements.

Origins of Fibonacci: From Nature to Financial Markets

The history of Fibonacci does not begin in the world of finance. Although the name is associated with medieval Europe, these numbers were discovered much earlier—around 400-200 BC—by an Indian mathematician who utilized these ratios in their counting systems.

What makes Fibonacci special is the Golden Ratio (Golden Ratio) embedded in structures such as seashells, sunflower centers, and even the facial proportions of the Mona Lisa by da Vinci. The belief that this ratio is a natural law led humans to apply it in art, architecture, and ultimately — financial markets.

What is Fibonacci? How to Calculate This Mysterious Ratio

Fibonacci consists of a sequence of numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987…

Creating this sequence is simple — add the two previous numbers:

• 0 + 1 = 1
• 1 + 1 = 2
• 1 + 2 = 3
• 2 + 3 = 5
• 3 + 5 = 8

And the magic appears when you start dividing these numbers:

Ratio 0.618 — divide a number by the next larger number (34 ÷ 55 ≈ 0.618)

Ratio 1.618 — divide a number by the previous smaller number (377 ÷ 233 ≈ 1.618)

Ratio 0.382 — divide a number by the number two places ahead (610 ÷ 1597 ≈ 0.382)

These ratios repeatedly appear in market prices, which is why Fibonacci tools have become a common weapon among traders.

Five Fibonacci Tools You Must Know

1. Fibonacci Retracement — Find price reversal points

When the trend is strong and begins to pull back, Fibonacci Retracement helps you determine how far it might go back.

How to use: Drag from the low to the high (for an uptrend). You will see support levels at 23.6%, 38.2%, 50%, 61.8%, and 100%.

These lines act as points where the price often pauses and reverses — historical trading evidence supports this.

2. Fibonacci Extension — Set profit targets when price breaks out

Opposite to Retracement, which looks at pullbacks, Extension predicts how far the price can go when breaking resistance levels.

How to use: Connect swing high/low points to the retracement point. The tool will display targets at 113.6%, 127.2%, 141.4%, 161.8%, 200%.

The 161.8% level is often a primary target for closing positions and taking profits.

3. Fibonacci Projection — View both downward and upward movements simultaneously

This tool combines Retracement and Extension, allowing you to see resistance points and targets in one view.

How to use: Draw by connecting 3 points — from a high to a low, then to the next high — and you get a complete price map.

4. Fibonacci Timezone — Predict timing of price changes

While Retracement looks at price, Timezone predicts time. The tool draws vertical lines at Fibonacci periods: 13, 21, 34, 55, 89, 144, 233 candles.

How to use: Plot from a key turning point; the vertical lines indicate days or hours when the next swing is likely.

5. Fibonacci Fans — Visualize important trend lines simultaneously

Fans are not horizontal lines like other tools but a “fan” of angled lines, each with a slope based on Fibonacci ratios.

How to use: Draw from a low to a high; the lines serve as dynamic support and resistance. When the price touches these lines, it often bounces back.

Real-World Scenario: How to Use Fibonacci Based on Situation

When the price pulls back (Pullback) — Find entry points

Imagine AUD/USD is trending upward at 0.7200 and then starts to decline. Using Fibonacci Retracement from the low to the high, you’ll see the price often halts at 38.2% or 50%.

Here you buy — When the price touches these levels and shows signs of reversal.

When the price breaks out (Breakout) — Set profit targets

Once it breaks out, what’s the target? Fibonacci Extension gives you the answer.

Use Extension on the breakout upward, and 161.8% or 200% levels tell you when to sell.

Range-bound markets (Range) — Trade between support and resistance

When the price lacks a clear trend, Retracement still helps. Draw between recent highs and lows, buy at support, sell at resistance.

Combining Fibonacci with Other Technical Tools

Fibonacci + EMA (Exponential Moving Average)

EMA indicates whether the trend is bullish or bearish (price above or below the line). Use Fibonacci Retracement to find good entry points.

Steps: Confirm trend with EMA → Use Fibonacci during pullbacks → Enter buy/sell when the price touches Fibonacci levels while remaining on the same side of the EMA.

Fibonacci + RSI (Relative Strength Index)

RSI shows if the market is overbought (risk of a correction) or oversold (risk of reversal).

Steps: Use Extension for targets → Watch RSI divergence at those levels → If RSI fails to make new highs while price does, it’s a sign to close the position.

Fibonacci + Price Action (Candlestick Patterns)

Price Action (such as doji, pinbars) confirms that the price truly reverses, not just “should” according to theory.

Steps: Use Fibonacci to set support/resistance → Wait for candlestick signals → Enter when both Fibonacci levels and price patterns align.

Installation and Practice

1. Open your trading platform → Find “Fibonacci Retracement” in the tools menu
2. Drag from low to high (or high to low) — lines will appear automatically
3. Right-click on the tool → Select “Settings” to adjust ratios like 25%, 75%

Pros and Cons

Advantages:

• Easy to use — just draw two points
• Applicable to all assets — stocks, currencies, commodities
• Widely used by major traders → proven effectiveness

Disadvantages:

• Not 100% accurate — price movements are influenced by many factors
• Requires confirmation — do not rely solely on Fibonacci; combine with other indicators
• Needs practice — traders can profit, others may lose — success depends on skill

Does Fibonacci Really Work?

The answer is often in big moves, but not always

Prices are affected by news, sentiment, and unforeseen events. Fibonacci is just a probability tool, not a certainty.

But why does it often work? Because millions of traders use it. If everyone expects the price to stop at 61.8%, that becomes a self-fulfilling point, influencing price movement.

Final advice: Study Fibonacci on demo charts or simulated accounts first. Get familiar with how prices react to these levels. Always remember — no tool guarantees 100%. Risks are always present. Manage your positions, set stop-losses, and never over-invest.

Fibonacci is a belief, a pattern, and a market rule combined. When you understand how to use it, you gain a powerful tool for smart trading.