Fibonacci Backtesting: How Can the "Divine" Tool Help Traders with Forex Layout?

Why Are Traders Using Fibonacci?

In the toolkit of forex technical analysis, Fibonacci retracement is arguably one of the most frequently used indicators. But why has this method remained popular over time? The answer is simple—it helps traders identify “high-probability” entry and exit points.

The Fibonacci trading method originates from an ancient mathematical discovery: the golden ratio. This ratio is considered a universal law describing natural phenomena, from honeycomb structures to galaxy spirals, and even to price fluctuations in financial markets. In the 13th century, Italian mathematician Leonardo Pisano (nicknamed Fibonacci) introduced this discovery to the West. Since then, this mathematical principle has been applied to trading, evolving into today’s Fibonacci retracement system.

The Secret of the Fibonacci Sequence: The Magic of 1.618

To understand Fibonacci retracement, you first need to grasp this fascinating sequence:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765…

This series may seem random, but it hides an astonishing pattern: each number is the sum of the two preceding ones.

Even more astonishingly, when you divide any number in the sequence by the previous one, you will always get a result close to 1.618. For example:

• 1597 ÷ 987 ≈ 1.618
• 610 ÷ 377 ≈ 1.618

This 1.618 is the legendary golden ratio, and it forms the mathematical basis of Fibonacci retracement.

From this ratio, other key numbers can be derived:

Inverse ratio 0.618 (which is 1 divided by 1.618): dividing a number in the sequence by the next one, e.g., 144 ÷ 233 ≈ 0.618, forms the basis for the 61.8% retracement level.

0.382 ratio: dividing a number by a larger two-digit number, e.g., 55 ÷ 89 ≈ 0.382, forms the basis for the 38.2% retracement level.

In other words, the seemingly magical percentages you see on charts—23.6%, 38.2%, 50%, 61.8%, 78.6%—all originate from this ancient sequence.

Fibonacci Retracement Levels: The “Secret Weapon” for Finding Support and Resistance

What is a retracement level?

Fibonacci retracement is simply a tool that, after a significant price movement, helps traders predict where the price might pause, reverse, or find support.

The operation is straightforward—mark two key price points on the chart (usually a clear high and low), and the system automatically generates five horizontal lines corresponding to different retracement percentages. These lines represent potential support or resistance levels.

Practical Example: Using Gold as an Example

Suppose gold rises from 1681 to 1807.93 (a gain of 126.93 USD). We use Fibonacci retracement to find potential reversal points:

• 23.6% level: 1777.97 USD
• 38.2% level: 1759.44 USD
• 50% level: 1744.47 USD
• 61.8% level: 1729.49 USD
• 78.6% level: 1708.16 USD

What do these levels mean? When gold drops from 1807.93, it might find “support” at these levels—areas where buyers could step in.

How Do Traders Use Fibonacci Retracement to Make Money?

Logic for Uptrend Trading

When an asset is in an uptrend, the price doesn’t go straight up—it retraces intermittently. The trader’s task is to find the “final support.”

具体做法：First, identify the low point A and the high point B, then observe when the price retraces. When the price hits a Fibonacci retracement level (e.g., 61.8%) and other technical signals (like candlestick reversal patterns, moving average crossovers) appear, traders can place buy orders at that level, expecting the price to resume upward.

Logic for Downtrend Trading

The opposite logic applies—identify the high point A and the low point B, then observe the rebound points. When the price bounces to a Fibonacci retracement level and other indicators also signal a sell, traders can set sell orders at that level.

Core Points

The advantage of Fibonacci retracement is that it provides concrete numerical references. Traders don’t have to guess—they can set:

• Entry points: at the retracement levels
• Stop-loss points: when the retracement line is broken
• Target prices: based on other methods predicting the next move

Fibonacci Extension: Predicting “How High” the Price Can Go

If retracement is for finding entry points, Fibonacci extension is used to set target prices and determine when to exit.

Extension Levels Percentages

Common Fibonacci extension levels include:

• 100%
• 161.8% (the most important, derived from the golden ratio)
• 200%
• 261.8%
• 423.6%

Practical Application

In an uptrend:

1. Identify three key points: X (low), A (high), B (retracement level)
2. Place a buy order at B
3. Use extension levels to predict where the price might reach (point C)
4. When the price hits C, consider closing the position for profit

In a downtrend, the logic is reversed: X becomes a high, A a low, B is the retracement level, and sell orders are placed at B, with profit targets set based on extension levels.

Practical Tips for Using Fibonacci Retracement

1. Don’t use it alone: The most effective way is to combine Fibonacci retracement with other technical analysis tools—like moving averages, RSI, support/resistance levels—to form “multiple confirmations.”

2. Different timeframes have different effects: Fibonacci levels on daily charts tend to be more reliable than on 1-hour charts because larger timeframes reflect more consensus among traders.

3. The 61.8% and 38.2% levels are most critical: Among all retracement levels, these are the most effective, with 50% being secondary.

4. Be cautious during price rebounds: When the price quickly hits a retracement level, don’t rush to enter—wait for confirmation signals (like reversal candlesticks, volume spikes).

Summary

Fibonacci retracement and extension form a complete trading decision framework: retracement helps you find “where to get in,” while extension helps you decide “where to get out.” This mathematical law from nature is effective in financial markets because it reflects the collective psychology of market participants—many traders make decisions at the same retracement levels, which can validate these levels themselves.

The key is to combine it with market context, multiple technical indicators, and risk management principles, rather than blindly following it as a “magical formula.”