The Golden MeanWhy does the photography rule of thirds work? Some people believe that it’s because it’s a rough approximation of the Golden Mean (also known as the Golden Ratio or Divine Ratio). The Golden Mean defines a spiral pattern that shows up repeatedly in Nature, in everything from a nautilus sea shell to a sunflower, to the spiral form of the galaxy itself; it occurs in more natural subjects than you could imagine, making it no coincidence. Since there’s obviously something special in Nature about this form, it makes sense that humans would be naturally attracted to it – after all we’re part of nature too!
The Math Behind the Golden Mean
You definitely don’t need to know this to take good pictures!! But for those who are “geeks” (like me 🙂 who want to know, here’s the math behind it.
The Golden Mean is defined by a mathematical sequence of numbers known as the Fibonacci sequence. By definition, the first two Fibonacci numbers are 0 and 1, and each remaining number is the sum of the previous two. So the sequence is:
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, ….
The ratio of each pair of consecutive numbers approximates phi, or the number 1.618. (5 divided by 3 is 1.666, 8 divided by 5 is 1.60…) By the 40th number in the series, the ratio has stabilized at 1.618, accurate to 15 decimal places.
Now, where does the spiral come from? We draw a rectangle that is divided into squares as in the picture below. The ratio of the length of the side of a larger square to the next smaller square is the golden ratio of 1.618:1.
A Fibonacci spiral is formed by connecting the arcs (quarter circles) joining opposite corners of the squares.
The Fibonacci spiral.
image source: wikipedia.org
And voila! A Fibonacci spiral!
The Golden Mean and the photography Rule of Thirds don’t quite line up, but they’re close. So you can avoid taxing your brain with all that math, and take the lazy route! Just follow the rule of thirds ;-).
The Fibonacci spiral in black, and the rule of thirds in pink. Close!
Now How Will Fibonacci Retracement really help you in your trades?
To clarify first Fibonacci retrcements are not actually exact just like The rule of thirds in photography. It is more of an estimation that will give you the big feature in a better view. Fibonacci retracement acts as a guide to an expected reversal. The three middle ratios of 38.2%, 50%, and 61.8% are very good guide/ signal to buy in order to profit when it reverses.
Again you have to confirm if such point is a good point to enter. You can analyze the candlesticks, volume, RSI, or MACD to verify if the general trend of the stock is northbound so that you can grab buying opportunity when the stock’s price dips to the three ratios.