Supply and Demand

The principle of supply and demand is key to economic theory. According to the Supply and Demand rule, if the supply of a product is considerable and the demand is low, the generated surplus will cause the price to fall. In the other case, if the supply of an item is low and the demand is strong, scarcity arises, driving up the price.

Supply and demand in the Forex market directly impact the price of a currency. A currency pair’s price will rise if there is a shortage of one currency and a high demand for another. The participants in the Forex market determine the supply and demand for a currency pair. A wide range of players are involved in the financial markets, including but not limited to investors, traders, banks, financial institutions, and governments. Participants in the Forex market constantly alter the supply and demand of currency pairs, resulting in a fluctuation in the market price.

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Supply and demand in the Forex market

The demand zone is the price range of a currency that traders tend to buy. Below the current price, where the most people are interested in buying, is where you’ll find the most buyers. This indicates that there are many buyers available in the demand zone due to the large number of buying orders at that level.

Supply zones are the price ranges where traders typically sell their assets. Anywhere above the current prices, there is the greatest potential for sales. As a result of the price reaching this area, many orders will be executed, and the price will fall. To better grasp, the idea of supply and demand zones, refer to the chart below.

How to find supply and demand areas on the Forex chart

To begin, zoom out your forex chart to get a more holistic view of the chart. Then look for price action turning points where prices have changed considerably. A supply level is typically defined as a turning point where the price goes rapidly away from the level downwards. On the other hand, a demand level is a turning point where the price rises fast, away from the level upwards.

Simply look for V-shape or upside-down V-shape patterns on the charts to find a turning point. Can you spot them on the above image? Alternatively, you may be able to use one of the supply and demand trading indicators which are usually available on your trading platform.

Supply and demand analysis in Forex

Forex trading based on supply and demand is a simple but effective method. In terms of pure price action trading mythology, it is widely considered one of the best out there. Forex supply and demand principles are straightforward. When the price action hits a demand level and bounces upwards, it’s time to buy. You can expect the price to rise due to the demand zone buy orders.

As a result, you’re in an excellent position to profit from an anticipated price change. When the price hits a supply level and starts to fall, that’s the time to sell. Because of this, you can anticipate an immediate drop in price as the accumulated selling pressure begins to take effect. A bearish trend can be exploited on the chart as a result. When you go long in the market, you should place a stop-loss order below the demand area. However, you should put your stop-loss order above the supply zone when you go short.

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The most common strategy is to keep your positions open until the price action on the chart reaches the opposite level. Therefore, if you’re going long near a demand level, you should keep your position open until the price action reaches the next supply zone on the chart. On the other hand, you should keep your positions open until the price reaches the next demand level on the chart when going short near a supply level. The level to aim towards is sometimes unclear or too far.

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Sometimes, the price cannot reach the opposite level. So, when determining your chart’s exit point, we recommend using a simple price action analysis. Price action signals like trends, channels, and swing tops and bottoms might help you do this.

Conclusion

Knowing supply and demand in Forex is crucial to understanding market imbalances and changing patterns. Because of this, forex market traders must thoroughly comprehend supply and demand before deciding to use this technique. Learning about different chart patterns alongside support and resistance levels can make traders’ jobs much easier when they want to use supply and demand rules for their trades.

Although supply and demand can help you find suitable entry and exit points in the market, we do not recommend using this strategy alone. You should always keep in mind that chart patterns can sometimes be misleading. That is why it is best to use a combination of technical tools to make a trade.