Fibonacci
Definition
Fibonacci refers to the mathematical sequence (0, 1, 1, 2, 3, 5, 8, 13, 21...) where each number is the sum of the two preceding ones. In forex trading, Fibonacci ratios derived from this sequence—particularly the golden ratio (1.618) and its inverse (0.618)—form the foundation for multiple technical analysis tools. The key ratios (23.6%, 38.2%, 50%, 61.8%, 78.6%, 161.8%, 261.8%) appear naturally in price movements and help identify potential support, resistance, retracement, and extension levels. Fibonacci tools include retracements (horizontal levels for pullbacks), extensions (profit targets beyond the original move), arcs (curved support/resistance combining price and time), fans (diagonal trendlines), and time zones (vertical projections for timing reversals).
Learn more: Fibonacci Retracement
Example
If EUR/USD rallies from 1.0700 to 1.1000 (300 pips), then pulls back to 1.0850 (50% retracement), traders can project Fibonacci extensions for profit targets: 127.2% at 1.1230, 161.8% (golden ratio) at 1.1330, and 261.8% at 1.1630. Many traders take partial profits at the 161.8% level and let runners target 261.8% in strong trends. The same ratios work in reverse for downtrends, helping identify where rallies might stall.
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Related Terms
Fibonacci Retracement
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