In forex trading, Fibonacci refers to a set of technical analysis tools based on mathematical ratios derived from the Fibonacci sequence. Traders use it to identify potential support, resistance, and retracement levels where price may reverse or continue.

Let’s break it down step by step:
1. Fibonacci Sequence
The Fibonacci sequence is: 0, 1, 1, 2, 3, 5, 8, 13, 21…
Each number is the sum of the previous two numbers.
The key part for trading is the ratios between these numbers, which appear frequently in nature and financial markets.

Common Fibonacci ratios used in trading:
23.6%
38.2%
50% (not strictly Fibonacci, but commonly used)
61.8% (the “golden ratio”)
78.6%

2. Fibonacci Retracement
Purpose: Identify potential levels where the price may pull back (retrace) before continuing the trend.
How it works:
In an uptrend, draw Fibonacci from swing low → swing high.
In a downtrend, draw Fibonacci from swing high → swing low.
The horizontal lines at 23.6%, 38.2%, 50%, 61.8%, etc., act as potential support/resistance levels.
Example:
EUR/USD rises from 1.1000 → 1.1200.
A 50% retracement level would be at 1.1100, where price may find support before continuing higher.

3. Fibonacci Extensions
Purpose: Identify potential levels for profit targets after a breakout or trend continuation.
Uses ratios like 127.2%, 161.8%, 261.8% to project price beyond the original swing.

4. Why Traders Use Fibonacci
It helps predict where price might stall or reverse.
Works well in combination with other tools (trendlines, candlestick patterns, moving averages).
Adds objective levels for entry, stop loss, and take profit.