How to Use the The Golden Ratio for Investing

 

I had always heard and read mentions of a mysterious number called The Golden Ratio, which supposedly can be applied to a whole range of subjects including art, biology, architecture, and even investing.  It’s a number very much like Pi or the Fibonacci sequence.

I won’t dispute the ratio’s importance in art and architecture because using geometry based on the Golden Ratio is considered aesthetically pleasing.  There’s no harm in that.  But for its use in hard science, I’d have to call bullshit.  I’m mainly talking about its use in technical analysis investing.

The stock market cannot be predicted by ratios because nobody can control decisions made in the market.  Ratios can only predict phenomena that cannot be controlled—things like gravity, radioactive decay rates, bacterial colony growth, or how we instinctually perceive beauty.  To use any mathematical principle to predict things that are very much in human control, such as the stock market, is complete hogwash in my opinion.

Now, for the sake of example, suppose somebody did find a ratio that predicts the stock market movements with 100% accuracy (which I believe is pure fantasy).  We all know that this person will use this knowledge to get rich off the stock market.  However, the moment this person begins to use this awareness on the stock exchange, the ratio would be disrupted.  Think about it.  If every investor found out about it, the stock market would leap to record highs every time the math predicted that the market would go up, then crash to oblivion every time the numbers show the market going down.  Just the knowledge of it will make people invest differently and make the predictions wrong.  This might be a case where observation can change the reality.  The same equation probably wouldn’t work once somebody else knew about it.

So if you ever figure out how to successfully apply The Golden Ratio, or the Fibonacci Sequence, or Pi to your investment practices, my advice is, don’t tell anybody about it.

Okay, after this big caveat, if you still want to use the Golden Ratio for investing, this video at Investopedia gives a quick overview of how you do it.