Fibonacci levels
What you learn in 3 minutesThis lesson shows how Fibonacci levels are drawn on a chart and what they actually mark. The tool divides one completed price move into fixed proportions, and the lines often sit where many other people have placed orders. We will price the exercise in naira so you can see what testing an idea costs before you risk anything.
Three lines on a 100 pip move
| Step | Amount | Note |
|---|---|---|
| Size of the completed move | 100 pips | From the low at 1.0800 to the high at 1.0900 on EUR/USD. |
| 38.2 per cent line | 1.0862 | 1.0900 minus 38.2 pips of the 100 pip move. |
| 50 per cent line | 1.0850 | 1.0900 minus 50 pips, the midpoint of the move. |
| 61.8 per cent line | 1.0838 | 1.0900 minus 61.8 pips of the 100 pip move. |
| Value of 1 pip on one standard lot | 10 units of the quote currency | 100,000 x 0.0001, then converted to naira at the current rate. |
| Value of 20 pips on 0.10 lots | ₦ figure varies | 20 pips x 0.10 lots x 10 units per pip = 20 units of the quote currency, converted at the rate your broker quotes. |
| Cost of one spread of 1 pip on 0.10 lots | ₦ figure varies | 1 pip x 0.10 lots x 10 units per pip = 1 unit of the quote currency, converted at the rate your broker quotes. |
Your broker may round the pip value, add a commission, or quote a wider spread at busy times. The naira amount therefore varies between brokers and between moments. Check the contract specification before you calculate.
The mistake people make here
The common mistake is to treat the lines as signals that price must turn. They are only levels where many people have drawn the same lines, so orders may cluster there. Price can pass straight through them. Instead, use them as places to watch, decide your entry, stop and target in pips first, then convert those pips into naira at the rate your broker quotes. If the naira cost of being wrong is more than you can accept, reduce the lot size or skip the trade.Check yourself
A move runs from 1.0800 to 1.0900. What price is the 50 per cent line?
The move is 100 pips. Half of 100 is 50 pips. 1.0900 minus 50 pips is 1.0850.
You trade 0.10 lots on EUR/USD and the price moves 20 pips in your favour. How many units of the quote currency is that before conversion?
20 pips x 0.10 lots x 10 units per pip = 20 units of the quote currency. Convert that to naira at the current rate to get the amount in ₦.
The spread is 1 pip and you trade 0.10 lots. What does the spread cost in units of the quote currency?
1 pip x 0.10 lots x 10 units per pip = 1 unit of the quote currency. In naira it depends on the rate your broker uses.