Golden Ratio in Stock Market Business: Does It, and How Does It Work?
The Golden Ratio can only be described as a phenomenal one. Over the years, this natural phenomenon of proportion and symmetry that results from number patterns referred to as the Fibonacci sequence has been shown to be useful in describing just about anything ranging from nature to universal patterns.
What’s more? Its application doesn’t stop there, it extends on to the stock market. The stock market is a very volatile one that requires close study and careful analysis in order to make educated guesses.
This implies that the stock market is predictable but can only be done with the right tools, and the Golden Ratio has been shown to have great practical application in doing just this. The market operates on the exact same mathematical base as the natural phenomena that the Golden Ratio is found to be applicable to.
Now to the next big questions, does this Ratio actually work? And if it does, how exactly does it work?
Does the Golden Ratio Work in Stock Market Business?
Although there has been a measure of scepticism following the Fibonacci sequence and the Golden Ratio, years of the application shows us that there just might be some truth to it. Now, for sceptics, a great number believe that the pattern of finding the Golden Ratio in different aspects of nature are a mere coincidence.
Now, predicting the stock market is basically trying to pinpoint the future value of a particular company’s stock or any other financial instrument that is typically traded on an exchange. There is, therefore, no gainsaying that correct prediction of a stock’s future price could result in a very significant profit.
But would the Golden Ratio work for this? And if yes, why would it?
The first aspect of this is the fact that the stock market is indeed predictable. And this would imply that there should definitely be ways of predicting it. Next is that the markets are said to be perfectly patterned indicating that the only changes would come as a result of human decisions.
Stock price changes typically occur as a result of human influence – particularly the higher-ups. This is usually as a result of diverse opinions, valuations, and expectations – all of which are human. A study carried out by mathematical psychologist Vladimir Lefebvre indicated humans distinctly showcased positive and negative opinion evaluation by a Ratio that is very close to phi – numerically 61.8% positive and 38 2% negative.
This clearly points out a pattern and goes on to show that the Golden Ratio and Fibonacci series does work in the stock market business. So to the next big question.
How Does the Golden Ratio Work in Stock Business?
The Golden Ratio is gotten from a pattern of numbers referred to as the Fibonacci sequence. The Fibonacci sequence is such that the next number in its series is derived by summing the two preceding numbers. It therefore typically begins with a zero or a one. Therefore, you would always find two number ones starting every sequence.
A representation of the Fibonacci sequence goes like: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, etc. Therefore by summing the two preceding numbers e.g 5+8=13, you get the next value in the series.
Taking two successive numbers from the Fibonacci sequence and dividing the second number by the first results in a value that is very close to the Golden Ratio’s largest positive value of 1.618.
Furthermore, switching the division pattern and dividing the first number by the second number in the Fibonacci sequence would bring you very close to the Golden Ratio’s smallest positive value of .618.
Stock Market analysts apply the Golden Ratio in studying significant price movement trends for a particular stock or the market as a whole. They use it for analyzing resistance and support of stocks and this is referred to as Fibonacci Time Zones, Arcs, Fans and Retracements. When these numbers are plotted on a chart, analysts usually include a high number of 100% and a low number of 0%. The resistance is when the stock price should stop increasing and the support level is when the stock price should stop decreasing.
The theory that backs this application is that whenever a stock sees a noteworthy price decrease or increase, its support levels and resistance and would be exactly at or very close to the Golden Ratio values.
Given that the stock market movement can be predicted using the Golden Ratio, calculating the total expected return on any stock becomes a whole lot easier. This basically goes to show that the Golden Ratio is applicable in the stock market business as well as other forms of trading.
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