Fibonacci Stocks

An investor faces numerous problems in buying and selling stocks. You must know which stocks are worth buying, and you must sell the stocks while you still have a profit rather than a loss. Since the stock market is constantly going up and down, you need to have some idea of how far it might go up from a bottom or a pullback. Even if you are a buy and hold investor, what happens if the market crashes 50% like it did in the financial crisis 0f 2008-2009? What if you need to get your money out when the stock market is in a bad downturn?

The solution is to sell whenever you have a good profit. Then, get back in when a pullback occurs. This is why a lot of investors and institutions follow technical charts for buying and selling. I recommend that you learn how to read charts, but there is another protective step you need to take also. Be familiar with the Fibonacci numbers that many stock market people use to predict chart patterns.

The actual Fibonacci number series goes like this: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, and so on. Each successive number is the sum of the previous two numbers, like 2+3=5, and 5+8=13. The stock market, however, uses a variation of this system. If you divide two successive numbers out to infinity, you will arrive at the golden ratio of .618. It is not obvious at first when you are dividing 1 by 2, and 2 by 3, but the rest of the number divisions like 5/8, 8/13, 13/21, 21/34, 34/55, and so forth come very close to the infinity ratio .618. So, this is one percentage number stock market technicians use for estimating deep pullbacks of stocks.

There are two other important numbers, .382 and .236. The first number is derived from dividing one Fibonacci number from the second successive number away, like 5/13 or 8/21. Then, the .236 ratio is obtained by dividing one number by the third number away in the sequence, such as 8/34.

These three ratios .618, .382, and .236 are often used to chart possible support levels for a stock whose price is falling. There will be many buyers for good stocks when they are a little over 20% down (.236). 50% down is also sometimes used, which would be 1/2. These ratios can also be used to determine the upside potential from stock bottoms or pullbacks.

Usually, stocks will be ready for a pullback when they have gone up 20% or more. Thus, if a stock's chart looks like it is rising from a bottom, simply take that price and multiply it by 1.236 to get a possible selling target that is a little more than 20% profit. If the stock can be bought for $20 after a pullback, you will want to sell when the price rises to $24.72. Of course, a strong stock could rocket 38% (.382) before it falls again. The point is that you need to have a plan for selling a stock while you still have a profit. You can always get back in later after a pullback because the stock market will never go straight up without a break.

These pullbacks will happen many times during each year. If you can set your sell targets 20% higher just five times per year and successfully take your profits, you will be making 100% on your money every year. This is highly possible if you are paying attention to the up and down cycles, and you have good stock picks. Remember also that many institutions use charting and Fibonacci setups to determine their buying and selling. There will be enough big boys playing the game in an organized fashion so that you can profit from their moves if you know what their probable steps will be!