In life, there are many ways to prove the existence of a thing, one of which is measure. If a thing can be measured, then it is proof that that thing is real. Talking about measurement and proportion, there is a specific ratio that can be used to describe the proportion of things in nature, known as the golden ratio. From the largest matter down to the smallest matter, there seems to be conformity to this special ratio for the sake of proportion and balance. Generally, this special ratio applies to everything perceivable, but in this article, we will focus on the use of the golden ratio in the financial market. Talking points include the following

• What a golden ratio really is

• The relationship between the golden ratio and the forex market

• Forex technical analytic tools developed based on the principle of the golden ratio

WHAT IS GOLDEN RATIO?

First, there is need to establish the fact that golden ration has to do with numbers. When a line is divided into two parts with one part longer than the other, and the longer part of the line is divided by the smaller part to give a certain number which is equal to the whole length of the line divide by the longer part. This definition is usually a bit too dicey at first but it is really easy to get. Here is a breakdown of what a golden ratio really is.

To find a golden ratio

1. Have a line, Y

2. Divide it into two parts, A and B, in a way that A is longer than B

3. If you divide the longer part, A, by the shorter part, B, you will get C

4. If you divide Y with A, you will also get C

If all of these terms are satisfied, then A and B are said to be in golden ratio

GOLDEN RATIO TOOLS IN THE FOREX MARKET

In forex trading, the golden ratio principle comes in as fibonacci. There are quite a lot of fibonacci tools that have been developed to take advantage of the golden ratio principle. Given to the nature of the golden ratio, it can be used in technical analysis to translate into three percentages – 38.2%, 50%, and 61.8%. There are many ways traders can apply the golden ratio principle in the way of the fibonacci ratio to the forex market; they are

1. Fibonacci retracements

2. Fibonacci arcs

3. Fibonacci time zones

4. Fibonacci fans

A quick study of these tools will bring to light how useful they are in estimating support and resistance. However, they are not intended to provide primary indications for timing entry and exit positions.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

Live Chat
Leave feedback