Fibonacci Tool in Trading: Unveiling the Golden Ratio’s Power in Price Movements

You may have heard about the Fibonacci numbers — a sequence of compounded consecutive numbers: 0, 1, 1, 2, 3, 5, 8, etc.

Leonardo Bonacci (better known as Fibonacci) was an Italian mathematician who described a rabbit population model in his book "The Book of Calculation." In this model, one rabbit pair becomes two pairs; two pairs become three pairs; three rabbit pairs become five — and the pattern continues.

In the 19th century, Édouard Lucas was the first to use the term "Fibonacci sequence." It has since been studied by many brilliant minds. One of the key insights they uncovered is this: when many numbers in this sequence are divided by the next number, the result is approximately 0.618 — also known as the inverse of the golden ratio.

The golden ratio itself is 1.618 and is commonly used in trading. In the Fib sequence, it occurs when each number is approximately 1.618 times the previous one.

In the first 100 Fibonacci numbers, the inverse ratio of consecutive Fib numbers falls between 0.617 and 0.619 a total of 91 times.

Other ratios used in Fib Retracement analysis are derived as follows:

• 0.236 is the inverse of the square of the golden ratio plus one
• 0.382 is the inverse of the square of the golden ratio
• 0.5 is not derived from the Fibonacci sequence but is commonly used in trading.
• 0.786 is also not a Fibonacci number but is the square root of 0.618.

While ratios between 0 and 1 are typically used to identify potential pullbacks within the main trend, values greater than 1 — 1.272 and 1.618 — are used to anticipate possible price targets if the asset manages to break through the crucial support or resistance marked as "1."

"0" is always used as the starting point of the main price movement.

"1" represents the current price level.

Trading is inherently conservative. We always presume the worst and anticipate the least. That is why it's advisable to see the current price as the potential end of the trend unless proven otherwise.

What is the Fibonacci Retracement tool?

The Fibonacci Retracement tool is used to identify price levels that align with these ratios. For example, here's a look at the Nasdaq futures chart using the Fib Retracement drawing tool during the latest market surge.

You can see how the 0.618 level served as strong resistance, broken only on the third attempt. After that, the Nasdaq soared 11.32% in just 41 days.

This tool comes in many variations. One of them is Fib Speed Resistance Fan.

It offers deeper insights into price dynamics and assesses how sharp the price movement is, which can signal a potential drop. A common rule: the sharper the angle, the more likely the pullback, and the heavier the potential losses.

The bottom line

Many trading theories have emerged over the years — from Gann squares, which blend geometric shapes, astrology, and mathematics, to cyclical market movements, Elliott Waves Theory and the Efficient Market Hypothesis, which states that market movements are random, and the Fibonacci sequence, rooted in natural mathematical patterns.

Despite their differences, all these theories share one common trait: each offers its own interpretation of how markets behave — not to agree with each other, but to present a unique lens on the truth.

Theories come and go, but the market remains. Why not keep Fibonacci in mind and study others as well?

You may find your personal trading style by combining different theories and tools in your own unique strategy.