Fibonacci levels

The proportions come from a sequence of numbers. Each number is the sum of the two before it: 1, 1, 2, 3, 5, 8, 13, 21, and so on. Divide one number by the next and you get roughly 0.618. Divide a number by the one two places ahead and you get roughly 0.382. Divide by the one three places ahead and you get roughly 0.236. The tool simply draws those ratios onto a price move.

On a chart the lines are placed between the start and the end of one completed move. If a move ran up from 1.0800 to 1.0900, the 0.618 line sits 61.8 per cent of the way back down from 1.0900. That is 61.8 pips, so the line is at 1.08382. The 0.382 line sits 38.2 pips back, at 1.08618. The 0.5 line is not a Fibonacci ratio at all, but most charting software draws it anyway.

None of this predicts anything. The lines are arithmetic, and arithmetic does not know where price will go next. What gives them weight is that thousands of people use the same software, the same ratios and the same starting points. When many orders sit near the same price, the market can react there. It can also ignore the level completely.

The cost of using the tool is zero in cash. Drawing a line on a chart costs nothing. The cost appears later, when a level tempts you into a trade you had not planned. That temptation is the expensive part, not the tool.

You need two points: the low and the high of the move you want to measure. Most platforms have a Fibonacci retracement tool. You click the low, drag to the high, and release. The software then draws horizontal lines at the ratios between those two prices. If the move went down instead, you drag from the high to the low. The direction only changes which way the lines are measured.

The choice of two points is yours, and that is the weak spot. One person measures the last hour. Another measures the last week. They will get different lines from the same chart. There is no rule that says which move is correct. Two people can both be right and still disagree about where the levels sit.

This is why the lines are best treated as a rough area rather than an exact price. A cluster of lines from several different moves matters more than one line from one move. If the 0.5 line from a short move and the 0.618 line from a longer move land near the same price, that area has more attention on it. It still does not have to hold.

Drawing the tool costs nothing in naira. The cost is in the time you spend choosing points, and in the risk that you trust a line because it looks neat. A neat chart is not a safer chart.

Suppose you watch the 0.618 line at 1.08382 and decide to buy if price reaches it. Before you place anything, write down your entry, your stop and your target in pips. Say the entry is 1.08382, the stop is 20 pips below at 1.08182, and the target is 30 pips above at 1.08682. Those are the numbers you control.

Now convert the risk into naira. On EUR/USD, one pip on one standard lot is 10 units of the quote currency. On 0.10 lots, one pip is 1 unit of the quote currency. A 20 pip stop is therefore 20 units of the quote currency. Multiply by the naira rate your broker quotes for that currency pair. If the rate is ₦1,500 to one unit, the stop is about ₦30,000. The exact figure varies between brokers and between moments.

The spread is a cost you pay on entry. If the spread is 1 pip and you trade 0.10 lots, that is 1 unit of the quote currency, or about ₦1,500 at the same rate. Some brokers add a commission on top. Some widen the spread when the market is busy. Check the contract specification before you calculate, because the naira amount is not the same everywhere.

If ₦30,000 is more than you are willing to lose on one idea, the answer is not a better line. The answer is a smaller lot size, or no trade at all. The level does not change the cost. Only your size does.