Well, my post title might be strange to you. If you have been reading my blog you might have read one of my post about me thinking twice in buying my very first DSLR camera(read all about it here).
As I get addicted to photography, which is by the way a very good hobby and past time specially if you like to combine exercise and art, I discovered one rule of photography in connection to framing(that is how we put the subject in the picture). The rule is called "The Rule of Thirds."
The frame is divided into a 3 x 3 frames in which the subject's most prominent part or the part you would like to focus to must be on or near the 4 points where the lines cross. This means the subject should not be in the middle of the frame but the area or part of the subject that you want to get your viewer's attention should be in line or near those points.
Now how is this connected to stock trading or investing?
The same mathematics is use in arriving at such a rule and that is the Fibonacci sequence which is sometimes called the "Divine Ratio".
Below is an excerpt from http://www.ultimate-photo-tips.com which explains more about "Divine Ratio".
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 MeanYou 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.