Skillsfirst Level 5 Diploma in Financial Trading (RQF) - Module 4 - Technical Analysis
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Mathematicians, scientists, and naturalists have known this ratio for years. It’s derived from something known as the Fibonacci sequence, named after its Italian founder, Leonardo Fibonacci (whose birth is assumed to be around 1175 AD and death around 1250 AD). Each term in this sequence is simply the sum of the two preceding terms (1, 1, 2, 3, 5, 8, 13, etc.).

But this sequence is not all that important; rather, it is the quotient of the adjacent terms that possesses an amazing proportion, roughly 1.618, or its inverse 0.618. This proportion is known by many names: the golden ratio, the golden mean, PHI and the divine proportion, among others. So, why is this number so important? Well, almost everything has dimensional properties that adhere to the ratio of 1.618, so it seems to have a fundamental function for the building blocks of nature.

Prove It!

Don’t believe it? Take honeybees, for example. If you divide the female bees by the male bees in any given hive, you will get 1.618. Sunflowers, which have opposing spirals of seeds, have a 1.618 ratio between the diameters of each rotation. This same ratio can be seen in relationships between different components throughout nature.

Still don’t believe it? Need something that’s easily measured? Try measuring from your shoulder to your fingertips, and then divide this number by the length from your elbow to your fingertips. Or try measuring from your head to your feet, and divide that by the length from your belly button to your feet. Are the results the same? Somewhere in the area of 1.618? The golden ratio is seemingly unavoidable.

But that doesn’t mean that it works in finance… does it? Actually, the markets have the very same mathematical base as these natural phenomena. Below we will examine some ways in which this ratio can be applied to finance, and we’ll show you some charts to prove it!

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