Golden Ratio

The golden ratio is approximately 1.618 : 1.  This ratio is commonly found in nature and architecture.  Stock traders often look for this ratio in patterns on stock charts.

One way to compute this ratio is to compare any adjacent Fibonacci numbers.  For this reason stock traders often refer to this type of analysis using the term Fibonacci, as in “Fibonacci retracements”.

Despite the common terminology, the golden ratio does not require Fibonacci numbers.  Another way to look at the golden ratio is to say that the larger number, often called Phi, is equal to its own reciprocal plus one.  This is useful in computation, and it is easy to show in a diagram.  Draw a rectangle where the length of the sides are related by the golden ratio.  Now, starting at the top left, draw the largest square which will fit in this rectangle.  The remaining part of this rectangle will be a smaller rectangle with the same proportions, but rotated 90 degrees.  Because the resulting rectangle has the same proportions, we can repeat this experiment any number of times producing smaller and smaller rectangles all with proportions matching the golden ratio.  When we perform analysis using the golden ratio we use this picture to remind ourselves of the underlying math.

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