The Fibonacci sequence is a series of numbers that were first derived by Leonardo of Pisa in the 15th century after observing the population expansion of a pair of rabbit. Recognising the importance of Fibonacci numbers to real-life application, mathematicians derived the Fibonacci Retracement levels for trading in the stock market; the latter levels being made up of 6 percentage numbers or lines. Depending on the preferred trading period of the trader, the Fibonacci Retracement lines are drawn for an uptrending stock by first identifying the bottom and then the top. After the identification of the bottom and then the top, we start to calculate the retracement levels between the highest price and the lowest price. Nowadays, this can be done by a simple click of the mouse. Most charting software in the market allow you to draw the Fibonacci Retracement levels effortlessly. ChartNexus is one such tool which also comes with free end of day data for download. The fibonacci retracement levels commonly used are 23.6%, 38.2%, 50% and 61.8% with the most significant levels being 38.2%, 50% and 61.8%. As the saying goes, what goes up must come down. In an uptrend, a stock will make higher high and higher low. Fibonacci Retracement is used to identify the price level as it retraces to a higher low before testing the higher high. The first possible level of support for a retracement is usually the 38.2% line. The following figure below illustrates how the 38.2% line is effectively tested as support in the chart of China Energy.
