8 Minutes to Understand Fibo: How to Use and Draw Lines Effectively

Whoever comes to trade has probably heard of “fibo” or the “Golden Ratio.” But in reality, what is fibo and how is it applied in actual trading? Many people might still be confused because, although it is a widely used tool, most traders only utilize a small part of its potential. Today, we will help you understand fibo deeply—from basic principles to how to draw lines effectively, and how to combine it with other tools to enhance trading accuracy.

What is Fibo and Where Does It Come From?

Understanding the Fibonacci Sequence

Fibo is a sequence of numbers that are mathematically related: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987… This sequence was not discovered recently; it dates back between 400 and 200 years BC, by an Indian mathematician.

Interestingly, these ratios appear frequently in nature, such as in seashells, sunflower petals, leaves on trees, and even in the proportions of the human body itself, which follow the Golden Ratio(. Leonardo da Vinci used this ratio in his masterpieces, but he did not invent it.

) How to Calculate Fibonacci Numbers

Calculating Fibonacci numbers is straightforward: add the two previous numbers to get the next one:

• 0 + 1 = 1
• 1 + 1 = 2
• 1 + 2 = 3
• 2 + 3 = 5
• 3 + 5 = 8
• 5 + 8 = 13
• 8 + 13 = 21

And the fascinating part begins here—no matter which two numbers you divide from this sequence, the ratio approaches a constant:

• 34/55 ≈ 0.618 ###or 61.8%(
• 55/34 ≈ 1.618 )or 161.8%(
• 610/1597 ≈ 0.382 )or 38.2%(

These ratios are used in fibo tools for various trading applications.

Fibo Tools Used in Trading

There are many fibo tools for trading, each serving different purposes:

) Fibonacci Retracement - A tool to find entry points

This tool helps identify potential support or resistance levels. When the price is retracing, draw a line from the lowest point to the highest point (or vice versa) from left to right. Horizontal lines will appear at levels 23.6%, 38.2%, 50%, 61.8%, and 100%.

How to Use:

• In an uptrend, buy at support levels Fibo 23.6%, 38.2%, 50%
• In a downtrend, sell at resistance levels Fibo 23.6%, 38.2%, 50%

Fibonacci Extension - A tool to find profit targets

This helps determine price targets after a breakout. Draw from the swing high/low to the retracement point, and the extension levels will be at 113.6%, 127.2%, 141.4%, 161.8%, 200%, 261.8%.

How to Use: When confident that the price will rise, set targets at 161.8% or 200% extension levels.

Fibonacci Projection - Combining both tools

This combines Retracement and Extension by drawing three points to observe both retracement and extension levels simultaneously.

Fibonacci Timezone and Fibonacci Fan

• Timezone: Draw vertical lines to identify important time periods ###levels 13, 21, 34, 55, 89, 144…(
• Fan: Draw sloped lines to find support and resistance levels with fibo-based angles

How to Use Fibo in Actual Trading

) Scenario 1: When the price pulls back ###Pullback(

1. Identify a strong trend )up or down(
2. Wait for the price to start retracing
3. Draw Fibonacci Retracement from the start of the trend to the retracement point
4. Wait for the price to dip and test the Fibo support at 23.6% or 38.2%
5. Enter a long position )Long( once the price breaks above that support

) Scenario 2: When the price breaks out

1. Draw Fibonacci Extension from the previous high through the retracement point, in the breakout direction
2. Set profit targets at 161.8% or 200% extension levels
3. Place stop-loss behind the last major support level

Scenario 3: Trading within a range

Although fibo is popular in trending markets, it can also be used in sideways ranges:

1. Draw Retracement from the high and low of the range
2. Buy at support levels 38.2% or 50%
3. Sell at resistance level 61.8%

Combining Fibo with Other Tools

Fibo + EMA (Exponential Moving Average)

This more advanced technique:

1. Use EMA###50( to identify the main trend
2. Wait for the price to start retracing
3. Draw Fibo Retracement to find support/resistance
4. Enter buy/sell only when the price tests support/resistance and remains aligned with EMA

) Fibo + RSI (Relative Strength Index)

This confirms signals:

1. Draw Fibo Extension to set targets
2. Check if RSI is in Overbought ###>70( or Oversold )<30(
3. If RSI shows divergence )price makes higher highs but RSI does not(, it warns of a potential reversal

) Fibo + Price Action

Proven method:

1. Draw Fibo Retracement
2. Wait for the price to approach support/resistance
3. Look for reversal candlestick patterns (Doji, Hammer, Engulfing) to enter trades

Example: Trading AUD/USD on a 15-minute chart

• Uptrend observed
• Price retraces downward, draw Fibo Retracement
• Wait for 38.2% level to form a Hammer candlestick
• Enter buy, set target at 161.8% Fibo Extension

Pros and Cons of Fibo

Advantages

• Easy to use, clear readings
• Versatile for all market conditions
• Trusted by traders and large funds worldwide

( Disadvantages

• Effectiveness depends on trader skill
• Should not be used alone; combine with other indicators
• Actual ratios may not always match Fibo levels precisely

Tips for Maximizing Fibo Effectiveness

1. Use appropriate timeframes - Fibo works better on 1-hour charts and above
2. Draw lines accurately - From the true swing low to swing high
3. Combine with other tools - Don’t rely solely on Fibo
4. Practice with demo accounts - Test strategies before real trading
5. Keep trading logs - Review how Fibo levels align with actual price movements

Summary

Fibo is a powerful technical analysis tool based on mathematical sequences hidden in nature. Its application is not overly complicated but requires judgment and integration with other indicators for best results. Studying and practicing on real charts will reveal how Fibo can truly enhance your trading decision-making.