Biology & Beyond -- A study by biologists from New Zealand* indicates how the magnetic sensing in fish, which is used for homing and long-distance migrations, is organized. Particles of magnetite, an iron-containing substance, are arranged in tiny rods embedded in four cells, located just beneath the cells lining the flaps within the nose. These rods orient to the earth's magnetic field. We don't know how signals from the magnetic detector are processed in the brain.
Although the existence of a magnetite-based magnetic receptor system has for decades been recognized in birds, some scientists doubted its function because birds are known to use a sun compass for orientation during migration. It's now recognized, however, that the magnetic sense in birds is a standby navigational system that goes into action if the sun compass isn't operational.
Trout, salmon and other fish use olfactory cues (acute sense of smell) to return to the streams in which they were born. The magnetic receptors and olfactory receptors are located almost on top of each other in the nose. Perhaps these systems work together, or perhaps fish have a navigational standby system similar to the system in birds.