Fibonacci Investing: How to Use the Golden Ratio on the Stock Market
Photo by Austin Distel
Just over 50% of Americans own stock. This is a considerable increase from twenty years ago when only 30% of Americans owned stock.
For many people, they avoid investing in stock because they find it intimidating.
If you want to try trading, take a lesson from the professionals!
Read this guide and learn how Fibonacci investing works and how you can get started today.
What Is the Golden Ratio?
The Golden Ratio is a mathematical equation that was first studied by Euclid. People have since found applications for its use in studying natural objects and man-made systems.
In nature, you can see the Golden Ratio in action with the spiraling of plant leaves. Another perfect example is the snail and the nautilus shell. These shells are the perfect spiral pattern that the equation creates.
It’s most commonly seen in geometry. A ratio qualifies if the ratio of the sum of the numbers divided by the larger number is equal to the ratio of the larger number divided by the smaller number.
What Are Fibonacci Numbers?
The Fibonacci numbers are closely related to the Golden Ratio. These numbers are a sequence where each number is the sum of the previous two. Start with 0 and 1.
The third number in the sequence would be 0+1=1. To find the fourth number in the sequence, you’d add one and one to get two. This continues on and on.
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…
Similar to the Golden Rule, the sequence appears in nature. The most common is the way a tree branches, the sprouting of a pineapple, or the way a pinecone is arranged.
How This Relates to Investing in Stocks
Technical analysts use three Fibonacci applications when looking at stock performance. Analysts use these equations to predict stock market prices. The goal is to determine the best price to buy and sell based on the market’s predicted movement.
- Fibonacci Retracements
- Fibonacci Arcs
- Fibonacci Fans
Fibonacci Retracements are shown on charts as a horizontal line. Arcs are a curved line. Fans are a diagonal line. You can use a ratio calculator to help you calculate the numbers needed to graph these lines.
This analysis marks where possible support and resistance levels are. You’ll commonly see a percentage with them.
Support levels are the price that an asset doesn’t fall before for a specified time. Resistance levels are the price at which the stock price stops because of the volume of owners wanting to sell at that price.
You’ll see these arcs drawn as half circles that get progressively bigger. These circles identify areas of support and resistance. The arc is a visual representation of both price and time.
The diagonal fan lines show you the overall trend by connecting the lowest and highest points. These lines can help you predict future support and resistance points.
Try Fibonacci Investing
This all may sound a bit confusing, but once you start looking at charts, Fibonacci investing will make sense. You’ll use these different equations to predict the best time to buy and sell.
While there are no guarantees when investing, you can push the odds more in your favor by using analytics to predict stock performance.
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