Fibonacci and the Golden Ratio: Your secret to understanding financial markets

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There’s a sequence that’s the quotient of the adjacent terms that possesses an amazing proportion, roughly 1.618, or its inverse 0.618. This proportion is known by many names: The Golden Ratio, The Golden Mean, Phi and the Divine Proportion, among others.  

And well, almost everything has dimensional properties that adhere to the ratio of 1.618, so it seems to have a fundamental function for the building blocks of nature.  

Such as what does dividing the female bees by the male honeybees in any given hive to get the amount of Sunflowers, which have opposing spirals of seeds have in common with trying to measure from your head to your feet. Then dividing that by the length from your belly button to your feet?  

Well the special ratio of 1.618 that can be used to describe the proportions of everything from nature’s smallest building blocks, such as atoms, to the most advanced patterns in the universe, such as unimaginably large celestial bodies. Nature relies on this innate proportion to maintain balance, but the financial markets also seem to conform to this golden ratio. 

Phi (1.618), the Golden Mean and the numbers of the Fibonacci series (0, 1, 1, 2, 3, 5, 8, …) have been used with great success to analyse and predict stock market moves, known as retracements. There are four primary methods for applying the Fibonacci sequence to finance: retracements, arcs, fans and time zones. 

These Fibonacci studies are not intended to provide the primary indications for timing the entry and exit of a stock; however, they’re useful for estimating areas of support and resistance.  

In the stock market, analysts use the Golden Ratio to examine major price movement trends for the market as a whole or for a particular stock. A trader may observe the intersecting points in a combination of the Fibonacci arcs and resistances analysing the support and resistance of stock prices, referring to it as Fibonacci Time Zones, Retracements, Arcs and Fans.  

When plotting these numbers on a chart, analysts include a low number of 0 percent and a high number of 100 percent. The support level is when the price of stock should stop decreasing and the resistance is when the stock price should stop increasing. The theory behind this application is that once a stock experiences a significant price increase or decrease, its resistance and support levels will be at or near the Golden Ratio numbers.

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