Terraria – What layer do Nymphs spawn on

Take a look at the example output from UberJumper's map viewer. The large, purple, angular structure on the left is the dungeon.

From what I've seen, it is a typical example. Dungeons start at ground level, run more or less vertically down into the rock layer, and then branch out, becoming mazelike. They may extend into the lower rock layer (where some lava starts appearing), but never into the underworld (where the sea of lava is). Dungeons are always underground, but are also always accessible from the surface.

Your spawn point is dead center in the world (horizontally, that is) and the dungeon spawns as far as it can towards either edge of the map (but never both; you only get one dungeon). This means that it is about as far away from the spawn as it is possible to get. Plus, you could always find you've gone the wrong way and be on the opposite side of the map. (If you find an ocean before you find the dungeon, you've gone the wrong way.)

I'd say go for it.

You might need a decent amount of health potions, but you have enough maximum health and a good armor to withstand his attacks. There's really not a lot you can do to dodge his attacks without Rocket Boots, especially the arms.

Obviously, ranged weapon are best. I recommend the Demon Bow and the best arrows you have. As a melee backup weapon, something with a very long reach is preferable (e.g., the Phaseblade or the Blade of Grass), but you should really pack enough arrows to make that unnecessary.

If you decide to brave the Underworld before doing battle with him, replace the Demon Bow with the Molten Fury and add the Flamarang as a backup weapon. I did so too, but I found surviving in the Underworld long enough to get a decent amount of Hellstone a lot more difficult than the Skeletron encounter. After the Dungeon, it might be more manageable if you found a Blue Moon.

Although, risking your hide just long enough to gather the 45 Hellstone required for the Molten Fury might just be worth it, since it does a lot of damage — more than double of what the Demon Bow does. Plus, you won't have to waste any torches on Flaming Arrow crafting.