Here's How I Used The Golden Ratio To Make Winning Investments During The COVID19 Pandemic

When my organization decided to shift to work-from-home culture soon after coronavirus pandemic struck earlier this year, I've asked to work from home. I was happy to save a lot of time commuting to the office —and score some extra hours in each day to revisit and amplify my visual and UX Design skills. 

My Graphic Designer friend shared how he used the Golden Ratio Law to design logos for his clients and how it can create visually-pleasing, organic-looking compositions in design projects or artwork.

Although I was aware of the Golden Ratio Law, I tried to explore more about it online. My research took me to one of the adequate explanations about this law by Md.Akhtaruzzaman and Amir A. ShafieI — Link here.

What is the Golden Ratio?

The Golden ratio, Otherwise known as The Golden Section or The Golden Mean is a mathematical ratio used when two quantities are divided in a way that their ratio is the same as the ratio of their sum to the larger one of the two quantities. That number is 1.618, also called Phi. The golden ratio is the ratio of approximately 1 to 1.618.

Approximately equal to a 1:1.61 ratio, the Golden Ratio can be illustrated using a Golden Rectangle where, if you cut off a square (side length equal to the shortest side of the rectangle), the rectangle that's left will have the same proportions as the original rectangle.

So if you remove the left-hand Square from the rectangle above, you'll be left with another smaller Golden Rectangle, and this could continue infinitely. Similarly, adding a square equal to the length of the longest side of the rectangle gets you increasingly closer to a Golden Rectangle and the Golden Ratio.

Ancient Greek architecture used the Golden Ratio to determine satisfying dimensional relationships between the width of a building and its height, the size of the portico and even the position of the columns supporting the structure.

While I was busy understanding the ratio, on 23rd March 2020, the Indian Stock Market Sensex lost 3,934 points to 25,981, and Nifty closed 1,135 points lower at 7,610 as coronavirus-led lockdowns across the world triggered fears of a recession. I was worried about my stocks portfolio as I've made a drastic loss during the pandemic.

Looking at the situation, I thought it is possible to make greater returns during a down market than in an upmarket because stocks have the potential to move higher from a lower starting point.

So I bounced back and shortlisted a few stocks that may make money in this down market. But the questions stay there - how to identify the right stock to invest that will gain profit in this pandemic time?

First, I keep tracking the movement of a few banking, pharma, and chemical stocks to see whether they are following the Fibonacci Sequences while retracement was occurring.

What is the Fibonacci Sequence? 

The Fibonacci Sequence is a series of natural numbers:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, …

0 and 1 are fundamental Fibonacci numbers. The next number is found by adding up the two numbers before it:

0+1=1, 1+1=2, 1+2=3, 2+3=5, 3+5=8, 8+5=13, 8+13=21, 13+21=34 and so on…

Here is a longer list: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765, 10946, 17711, 28657, 46368, 75025, 121393, 196418, 317811, …

The number of petals of flowers shows the Fibonacci sequence that occurs in nature. Most have three (like lilies and irises), five (parnassia, rose hips) or eight (cosmea), 13 (some daisies), 21 (chicory), 34, 55, or 89 (Asteraceae).

How do we calculate the Golden Ratio out of Fibonacci Sequences?

When we take any two successive (one after the other) Fibonacci Numbers, their ratio is very close to the Golden Ratio (1.618). 

Fibonacci Numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144,

Divide any number in the series by the last number; the ratio is always approximately 1.618. E.g.

144/89 = 1.618

89/55 = 1.618

55/34 = 1.618

The ratio of 1.618 is considered as the Golden Ratio, as discussed above.

Further into the ratio properties, one can find remarkable consistency when a number in the Fibonacci series is divided by its immediate succeeding number. E.g.

89/144 = 0.618

55/89 = 0.618

34/55 = 0.618

At this stage, do bear in mind that 0.618, when expressed in percentage is 61.8%.

Similar consistency can be found when any number in the Fibonacci series is divided by a number two places higher. E.g.

55/144 = 0.382

34/89 = 0.382

21/55 = 0.382

0.382, when expressed in percentage terms, is 38.2%

Also, there is consistency when a number in the Fibonacci series is divided by a number three place higher. E.g.

34/144 = 0.236

21/89 = 0.236

13/55 = 0.236

0.236, when expressed in percentage terms, is 23.6%.

Fibonacci ratios, i.e. 61.8%, 38.2%, and 23.6% can be applied when there is a noticeable up-move or down-move retracement in prices.

What is Retracement?

If the market is moving in a downtrend, then it temporarily reverses to uptrend is retracement upside. Similarly, if the market is moving in an uptrend, then it temporarily reverses to downtrend is retracement downside.

Whenever the stock moves either upwards or downwards sharply, it usually tends to retrace back before its next move. For example, if the stock has run up from Rs.500 to Rs.1000, then it is likely to retrace back to probably Rs.800 before it can move Rs.1300.

I used the retracement level forecast techniques to identify up to which level retracement can happen so that I can position myself in the direction of the trend. The Fibonacci ratios, i.e. 61.8%, 38.2%, and 23.6%, helped me to identify the possible extent of the retracement. 

Have a look at the chart below:

As per the Fibonacci retracement theory, after the down move, one can anticipate a correction in the stock to last up to the Fibonacci ratios. For example, the first level up to which the stock corrected is 61.8%. Then the stock continues to correct further at 38.2% and 23.6% levels.

Even if the stocks are falling, you can apply the Fibonacci retracements to identify the levels, up to which the stock can bounce back.

In the chart below (Asian Paints), the stock started to decline from Rs.1867 to Rs.1483, thus making 384 points as the Fibonacci down move.

After the down move, the stock attempted to bounce back retracing (Retracement L1) back to Rs.1573, which is the 23.6% Fibonacci retracement level. It also reached the 38.2% level (Retracement L3).

The Contract Note:

Retracement L1: I've taken a trade at 23.6% level (Rs.1573) and square-off my position by placing the order at the 38.2% level (Rs.1630)

L1 = 1630–1573 = 57

57 x 300 (Lot Size) = Rs.17,100

17,100 x 3 lots = Rs.51,300 (Profit)

Retracement L3: I've taken a trade at 38.2% level (Rs.1630) and squared off my position trade by placing the order once it crossed the 61.8% level (Rs.1720)

L3 = 1720–1630 = 90

90 x 300 (Lot Size) = Rs.27,000

27,000 x 5 lots = Rs.1,35,000 (Profit)

So, I made a profit of Rs.52,300 and Rs.1,35,000 simultaneously following the Golden Ratio and the Fibonacci sequences. I’ve made several intraday and positional trade calls following the Golden Ratio law and created decent wealth in different stocks, e.g. ALKYLAMINE, BAJFINANCE, EICHERMOT, HEROMOTOCO, ASIANPAINT, etc..

There are other indicators and technical analysis you need to tap while shortlisting the right stock like keeping track of RSI, MACD and Signals lines co-relation, P/E Ratio, Stock EPS (Earning per share) etc..

There is a saying "Designers are not good with numbers" Is it a myth or reality? I don't know. But learning more about the Golden Ratio Law of Design helped me survive this momentum of pandemic and earn a few bucks. What is your thought?