Ratios that reflect structure of growth and decay in nature and are also used in technical analysis
Fibonacci ratios can be derived from a series of integers starting with any 2 numbers. You add the 2 numbers, and get a sum. The sum is then added to the previous number and a new sum is calculated. As this process continues, it does not matter starting with which 2 numbers, the ratio between a number and the next will always be the same. For example if you start with 1 and 2, we have:
1,2, next number (1+2)=3, next number (3+2)= 5, next number (5+3) = 8, 13, 21, 34, 55, 89, 144, etc….
1+2=3, 3+2=5, 8,13,21,34,55,89,144….The ratio between a number and the previous approaches 161.8%
89/55 = 1.618; 55/89 = 0.6179
144/89 = 1.6179; 89/144 = 0.618
etc.
5+10 = 15, 15+10=25, 40, 65, 105,170,275…It does not matter what 2 numbers you start with. The growth rate will always approach 161.8%.
170/105 = 1.619; 105/170 = 0.6176
275/170 = 1.6176; 170/275 = 0.61818
61.8%
100% – 61.8% = 38.2%
34/144 =23.6… 100-23.6 = 76.4%
*Square root of .618 = 0.786 or 78.6%
These ratios are used by technicians in projecting trends and reversals, as well as spot levels of importance and therefore attention worthiness. These ratios are claimed to be found in nature, although empirical evidence will probably show it is not so perfect. For example, though the human body should have a ratio of leg to entire body near 61.8%, it is not always the case, and it is more likely that most people do not have this perfect ratio. The point is not precision, but a concept of nature growth and decay that we might apply to the financial markets, because the markets reflect something natural as well – human behavior.
