What is the Fibonacci Sequence?
The Fibonacci sequence is a series of numbers where each number is the sum of the two preceding ones: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144... This mathematical pattern appears throughout nature - from flower petals to galaxy spirals.
The Golden Ratio: 1.618 (φ)
When you divide any Fibonacci number by its predecessor, you get approximately 1.618 - the "golden ratio" or phi (φ). This ratio and its inverse (0.618) form the foundation of Fibonacci trading.
Key Fibonacci Ratios in Trading
💡 Why Does Fibonacci Work in Trading?
Markets are driven by human emotion. The same mathematical patterns that govern natural phenomena also influence collective human behavior. Whether it's self-fulfilling prophecy or something deeper - Fibonacci levels consistently produce reactions in price.
Fibonacci Retracements
A Fibonacci retracement measures how much of a prior move price has "retraced" (pulled back). It helps identify potential support and resistance levels where price might bounce.
The Core Concept
After a strong move, price rarely continues in a straight line. It pulls back (retraces) before continuing. Fibonacci retracements predict WHERE those pullbacks might end.
Retracement Levels Explained
| Level | Meaning | Trading Implication |
|---|---|---|
| 23.6% | Shallowest retracement | Strong trend, minor pause. Aggressive entry. |
| 38.2% | Moderate pullback | Healthy trend. Good entry if trend is strong. |
| 50% | Halfway back | Psychological level. Not a true Fib but widely watched. |
| 61.8% | The Golden Ratio | MOST important level. If this holds, trend is likely intact. |
| 78.6% | Deep retracement | Last chance for trend to hold. Weak if broken. |
🏆 The 61.8% Rule
If you only watch ONE Fibonacci level, make it 61.8%. This is the golden ratio - the most significant retracement level. Price reactions here are the most reliable.
How to Draw Fibonacci Retracements
Drawing Fibonacci correctly is crucial. The wrong anchor points produce meaningless levels.
For an Uptrend (Bullish Move)
Find the significant low where the uptrend began
Find the significant high where the uptrend peaked (before pullback)
Click the swing low, drag to swing high. 0% at bottom, 100% at top.
As price pulls back, these levels become potential support (buy zones)
For a Downtrend (Bearish Move)
Find the significant high where the downtrend began
Find the significant low where the downtrend bottomed (before rally)
Click the swing high, drag to swing low. 0% at top, 100% at bottom.
As price rallies back, these levels become potential resistance (sell zones)
⚠️ Common Mistakes
- Using minor swings: Use SIGNIFICANT swing points, not every little high/low
- Wrong direction: Always draw in the direction of the move you're measuring
- Multiple overlapping Fibs: One set at a time. Too many creates confusion.
Fibonacci Extensions
While retracements tell you where pullbacks might END, extensions tell you where the next move might REACH. Extensions are used for profit targets.
Key Extension Levels
How Extensions Work
Example: Bullish Setup
- Price moves from 1.0800 to 1.0900 (100 pip move)
- Price retraces to 1.0850 (50% retracement)
- Price resumes uptrend
- Extension targets from 1.0850:
Fibonacci Confluence
The most powerful Fibonacci trades occur when multiple factors align at the same level. This is called confluence.
What is Confluence?
Confluence means multiple independent reasons to take the same trade. The more factors that align, the higher the probability of success.
Fibonacci + Other Tools
Fib + S/R Level
When Fib retracement lands on a horizontal S/R zone = strong confluence
Fib + Trend Line
Fib level that coincides with trend line = double reason to expect reaction
Fib + Moving Average
61.8% Fib + 200 EMA = institutional level confluence
Fib + Candlestick Pattern
Reversal candle (hammer, engulfing) at Fib level = entry confirmation
Fib + RSI Oversold/Overbought
Price at 61.8% with RSI oversold = multiple momentum signals
Fib + Chart Pattern
Pattern target landing on Fib extension = price magnet
🏆 The Confluence Rule
Never trade a Fibonacci level alone. Wait for at least 2-3 confluence factors before entering. Single-factor trades have low probability.
Fibonacci Trading Strategies
Strategy 1: Fib Retracement Entry
📈 Buy the 61.8% Pullback
Strategy 2: Fib Extension Targets
🎯 Scaling Out at Extensions
Once in a winning trade, use Fib extensions for profit taking:
- Take 50% profit at 127.2% - lock in gains
- Move stop to breakeven
- Take remaining 50% at 161.8% - or trail stop
Strategy 3: Multiple Timeframe Fib
📊 Higher TF Direction, Lower TF Entry
- Draw Fib on Daily chart to find the zone (e.g., 50-61.8%)
- Drop to H4 or H1 for entry timing
- Wait for price to enter the Daily Fib zone
- Look for reversal pattern on lower TF
- Enter with tight stop on lower TF
This gives you the reliability of higher TF levels with the precision of lower TF entries.
Common Mistakes to Avoid
Trading Fib Alone
Fib levels without confluence are weak. Always combine with other factors.
Wrong Swing Points
Using minor swings produces unreliable levels. Use significant, obvious swings.
Too Many Fibs
Drawing Fib on every move creates confusion. Use one clear setup at a time.
Ignoring Context
Fib in a range or choppy market is less reliable than Fib in a clear trend.
Key Takeaways
61.8% is the golden ratio - the most important Fibonacci level to watch.
Retracements for entries, extensions for targets - know the difference.
Draw from significant swing points - not every minor high and low.
Confluence is essential - never trade Fib alone; combine with S/R, MAs, candles.
Use multiple timeframes - higher TF for levels, lower TF for entry precision.
🎉 Congratulations!
You've completed the Intermediate Technical Analysis Course!
You now understand the core tools that professional traders use every day:
- ✅ Chart reading and price action
- ✅ Candlestick patterns
- ✅ Support & Resistance
- ✅ Trend lines & Channels
- ✅ Moving Averages
- ✅ RSI & Oscillators
- ✅ Chart Patterns
- ✅ Fibonacci Analysis
The next step is to practice. Apply these tools on demo accounts, study charts daily, and develop your edge.