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Fibonacci retracement levels are a popular and sometimes wildly successful trading method.  It can be thought of as either a technical trading tool, or even a psycological trading tool.

Leonardo Fibonacci was born in Pisa Italy in the 12th century.  His father Guglielmo was a trading post director near Algiers.  Leonardo often travelled there to help his father and became fascinated with numbers and trading.  At the age of 32 he published Liber Abaci, or Book of Calculation.   One problem discussed in the book was the hypothetical population growth of rabbits, which was based on a sequence of numbers called the Fibonacci numbers.  In the sequence, each number is the sum of the preceding two – 0, 1, 1, 2, 3,  5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, and so on.  And the ratio of any number to its subsequent number approaches the golden ratio, or .618.  That golden ratio is very popular in nature, and is also sometimes effective in predicting retracement levels in the stock market.

Creating Fibonacci retracement lines is very easy to do from within Optionsxpress.  First, select Flexcharts from the Quote menu.  Next enter the desired symbol or index, select the timeframe and line type, and use the select tool to choose Fibonacci retracement, as shown below.

Fibonacci retracement lines are drawn from two extreme points within a clear past trend.  They can be drawn on a minute by minute day trading chart or a larger weekly, monthly or yearly chart.  The example below is from a 6 month daily chart of Walmart, and the Fibonacci lines are drawn using the peak and low from the large downward trend during April.  Once the Fibonacci retracement select tool is chosen, just point and click twice on the chart – once for each extreme point within the desired trend.  The example is shown below.

Exactly how well do these retracement zones work?  That you will have to decide for yourself, but do it with your own money and at your own risk! I would also recommend reading a bit more on the subject before diving in with real money.

For a more in depth explanation of Fibonacci trading, I highly recommend the following book:

Fibonacci Trading: How to Master the Time and Price Advantage by Carolyn Boroden