Updated: Nov 16, 2019
Try measuring from your shoulder to your fingertips, and then divide this number by the length from your elbow to your fingertips. you will get ~1.618 OR
Try measuring from your head to your feet, and divide that by the length from your belly button to your feet. you will get ~1.618.
But that doesn't mean that it is useful… does it?
If you understand what I am trying to explain now, it can be the most useful ratio for you because It can make you money.
Some of the greatest mathematical minds of all ages, from Pythagoras, Euclid, Leonardo of Pisa and the Renaissance astronomer Johannes Kepler, Roger Penrose, have spent endless hours over this simple ratio and its properties. But the fascination with the Golden Ratio is not confined just to mathematicians. Finance graduates, Stock market experts, Biologists, artists, musicians, historians, architects, psychologists, and even mystics have pondered and debated the basis of its ubiquity and appeal. In fact, it is probably fair to say that the Golden Ratio has inspired thinkers of all disciplines like no other number in the history of mathematics.
The question is, How?
Let me explain it to you with an example:
Suppose you have, say 1,00,000 Rs with you and you want to invest your money somewhere so that it can grow with time at least faster than the inflation which is around 5–6%. The question is where to invest?
After proper analysis, you have decided to put your money in equity market, which is proved to become the best wealth creator of the world. But the problem is you don’t know how to choose a stock to invest but what you do know is ‘Golden ratio’. 'Whenever a stock moves either upward or downward sharply, it tends to retrace its path before the next move'
The Fibonacci sequence is a series of numbers, where a number is found by adding up two numbers before it. Starting with 0 and 1, the sequence goes 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, and so on and so forth till infinity. If we divide any of the numbers in the series by the previous number; the ratio is always approximately 1.618.
Divide any number in the series by the previous number; the ratio is always approximately 1.618.
For example: 8/5 = 1.618 21/13 = 1.618
Further into the ratio properties, one can find remarkable consistency when a number is in the Fibonacci series is divided by its immediate succeeding number.
For example: 2/3 = 0.618 13/21 = 0.618
At this stage, do bear in mind that 0.618, when expressed in percentage is 61.8%.
Similar consistency can be found when any number in the Fibonacci series is divided by a number two places higher.
For example: 13/34 = 0.382 21/55 = 0.382 34/89 = 0.382
0.382, when expressed in percentage terms, is 38.2%
Also, there is consistency when a number in the Fibonacci series is divided by a number 3 place higher.
For example: 13/55 = 0.236 21/89 = 0.236 34/144 = 0.236 55/233 = 0.236
0.236, when expressed in percentage terms, is 23.6%.
Now here is the game plan.
Whenever a stock moves either upward or downward sharply, it tends to retrace its path before the next move.
Fibonacci ratios i.e. 61.8%, 38.2%, and 23.6% can help a trader identify the possible extent of retracement. Traders can use these levels to position themselves for a trade.
Think of a situation where you wanted to buy a particular stock but you have not been able to do so because of a sharp runup in the stock because you are not an expert.
In such a situation, the most prudent action to take would be to wait for a retracement in the stock price. Fibonacci retracement levels such as 61.8%, 38.2% and 23.6% act as potential levels up to which a stock can correct.
In the chart below (NCC), the stock started to decline from a high of Rs. 141 from 80 Rs. and broke as per Fibonacci series, but finally took support at the 23.6 % ( 103 Rs.) retracement and bounced back.
Top: 141 Rs Bottom: 80 Rs. and retracement levels are:
You can observe that, after declining from top-level i.e. 141 Rs, stock stopped at 61.8% level and again after surging to 135 levels it came down to a 50% level that is 112 Rs. again after touching 135 levels, it came back to 103 levels and bounced back. This is not a coincidence and can be applied for any stock.
So, in this case, you could have bought the stock at 103 Rs, 111 Rs. etc. for maximum gains.
Here I haven’t applied any fundamental analysis or Technical analysis.
Note: While selecting a Stock, analyse the stocks in every way. I personally consider company’s brand name , value , Mcap , book value , PE ratio , PBV , Earnings per share , Return of equity , net profit flow , debts verses equity, investors cash flows , FIIs interests , ability to repay the debt , ability to repay the liability , cash inflow , cash outflow , Deliverables , Dividend payout , earning retention , forecasting of future performances based on past values , intrinsic value , margin of safety , PEG , interest earned , annual revenue growth , CAGR , candlestick diagram patterns , retracements and so many other factors like this.