The Value of Ratios & Waves

Fibonacci & Other Ratios

Useful, Use Less or Useless? 

Fibonacci ratios, Elliot wave counts and other metrics are interesting exercises but one should investigate whether the mathematical trend evidence concurs with those outlooks.

Determining the true trend in the daily, weekly and monthly time frames must precede any other confirmation investigation into other investing criteria since a trend includes all the known and unknown variables.

The Fibonacci Problem

Leonardo Bonacci (or Pisano) was a mathematician from the 12th century. Originally, there was no such thing as Fibonacci. The origin of "Fibonacci" lies in the shortening of the Latin "filius Bonacci" which means "the son of Bonaccio" in 1838, more than 500 years after he died.

There is a real problem with Fibonacci ratios. These were developed from Leonardo's original 1202 AD mathematical study into the propagation habits of rabbits.

Nowhere in Fibonacci ratios is there a discussion of the ultimate end of Leonardo's rabbit growth cycle due to other factors such as overpopulation, food supply or disease.

Leonardo's Primary Gift

In Fibonacci Research, Leonardo's main contribution was the introduction of Hindu-Arabic numerals to the west. He did NOT create or invent Fibonacci number sequences. These were already known as early as the 6th century in India or from 200 BC in work by Pingala. 

In addition, he did NOT invent Fibonacci ratios. These came later from research by others into his number sequences and their relationships. 

Investment Applications

Unfortunately, those progressive math sequences (to infinity, incidentally) have been adopted, migrated and defined into investment decisions as gospel truth price ratios with predictive characteristics on a short term basis. 

They are typically defined as percentage measurements for advances or declines. Of course, these percentage ratios are randomly present in nature, no doubt about it. Indeed, these ratios do occasionally occur in investing and may coincide randomly with market price changes and various support/resistance  levels. 

But they may also achieve a Fib ratio of 41.3 or 67.9 just as easily as 38.2 because there are advances and declines of various degrees at different times on a cyclic level.

They also do not define the herd instinct. Fibonacci ratios deal only with the principles of potential growth or decline, not total time frame trend structure or direction.

Consequently, this total picture is an interesting mathematical exercise but is clearly incomplete without the inclusion of all relevant factors and variables.

At the very least, they would be better served checking support and resistance zones.

Alternative Ratios

The Golden Mean Ratio or PHI (1.618) are interconnected with Fibonacci numbers and ratios but only deal with structure and proportion. Some use occurs in investing but with questionable results. 

Here again, Golden Ratios and Fibonacci sequences are not the answer to everything, as clearly detailed in this video here.

Most would be better served to observe comparison ratios, such as the XAU/Gold ratio or the Gold/SPX ratio where one can determine if the primary index is running faster or slower to another related index or stock. In effect, a relative strength comparative indicator.

Precision time and distance measurements including the mathematical constant PI (3.141) have great relevance in time as clearly outlined here and here.

In the natural world, PI is also suggested to provide the context to explain the "relationship of gravity, momentum and energy." 

Elliot Wave Theory

Another attempt at defining trends is the Elliot wave theory where periodic highs and lows are recorded in a count structure that allegedly indicates a trend. Unfortunately, one never knows with any certainty what the trend is because there is always an “alternate count”, which is also constantly changing. I have never seen anyone make money consistently with Elliot Waves.

The trend is not about measuring the waves because wave analysis is about as valuable as a rear view mirror in a head on collision with a rock. The trend is all about direction, energy and flow.

So What is the Answer? 

A time frame trend defines all the variables and factors, known and unknown. It is vastly superior to any other methodology. 

The primary objective of any trade is to identify that trend, starting first in the daily time frame. 

All other activities are largely useless noise and nonsense.

In Conclusion

Fib ratios may occasionally coincide and be useful with general support and resistance levels but are not trends or direction. It is a relationship study only, not a mysterious hidden code from the universe that answers everything.

To repeat, Fibonacci ratios, Elliot wave counts and other metrics are interesting exercises but one should investigate whether the mathematical trend evidence concurs with those outlooks.

2015 (Updated 2024)