Fibonacci levels
What you learn in 3 minutesThis lesson shows how a Fibonacci grid divides one completed price move into fixed proportions. You will learn to place the 38.2, 50 and 61.8 lines on a finished EUR/USD move around 1.0850, and to work out what one pip costs in shillings on a standard lot.
One move, three levels, and the cost of a pip
| Step | Amount | Note |
|---|---|---|
| Move used | 1.0800 to 1.0900 | a completed rise of 100 pips on EUR/USD |
| 38.2 per cent level | 1.0862 | 1.0900 minus 0.00382, which is 38.2 per cent of 100 pips |
| 50 per cent level | 1.0850 | the midpoint of the move |
| 61.8 per cent level | 1.0838 | 1.0900 minus 0.00618, which is 61.8 per cent of 100 pips |
| One pip on one standard lot | 10 units of the quote currency | 100,000 x 0.0001, then converted at the current rate |
| One pip on 0.10 lots | 1 unit of the quote currency | one tenth of the standard lot figure |
| One pip on 0.10 lots in KSh | about KSh 129 | 1 unit of the quote currency converted at about KSh 129 to the unit; the exact figure moves with the rate |
Brokers differ in how they round prices, whether they charge a spread or a commission, and what conversion rate they use for the shilling. Check the contract specification and the fee schedule on your own platform before you size anything.
The mistake people make here
The common mistake is to treat a Fibonacci level as a place where price must turn. It is only a line that many people have drawn, so it can be crossed, ignored or overshot. People also redraw the grid every few minutes to make it fit whatever price is doing, which removes the only useful part of the exercise. Draw the grid once on a clear completed move and leave it alone. Then decide in advance what you would do if price reaches the line and what you would do if it passes straight through.Check yourself
A completed EUR/USD move runs from 1.0800 to 1.0900. Where is the 50 per cent level, and how many pips is that from the top of the move?
The move is 100 pips. Half of 100 is 50 pips. The 50 per cent level is 1.0900 minus 0.0050, which is 1.0850. That is 50 pips below the top.
On 0.10 lots of EUR/USD, one pip is 1 unit of the quote currency. If that unit is worth about KSh 129, what is the value of a 40 pip move in KSh?
40 pips x 1 unit per pip = 40 units of the quote currency. 40 x KSh 129 = about KSh 5,160. The exact figure depends on the conversion rate at the time.