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Complete Guide to Supply and Demand in Forex

Complete Guide to Supply and Demand in Forex

You don’t have to be a student of Economics to know that the forces of supply and demand are responsible for the changes in prices of any commodity in an open market. It can include everything from rice to precious metals such as gold. It determines the price of everything from your local farmers market, to a rare, one-of-a-kind jewel, to the foreign exchange market.  

The concepts of supply and demand are simple yet highly complex simultaneously. When we have more buyers than sellers, the market price will increase. Conversely, when sellers outweigh buyers, the prices will fall. The driving force behind price fluctuations is supply and demand. To get different dimensions on price movements, you can compare forex brokers on Brokersview.

Traders that understand the economics of demand and supply will better understand the price movements in the forex market. Supply and demand work similarly for all the currency pairs. Supply and demand in forex trading provide a similar simple system that gives good profits without technical indicators. Instead, it interprets the bare price action itself.

When buyers disagree with the price of a particular currency, its price plummets to meet the demands of the traders. Similarly, it shoots up when there is a demand for it. This buying and selling are relative to supply and demand. Simply speaking, buyers represent the forces of demand while sellers represent supply.

Economic Theory

The supply and demand concept is a critical component of economic theory. If the supply of a commodity is high and the demand is low, this generates surplus driving the price down. On the other hand, if the supply of a commodity is low and the demand is high, it creates scarcity, pushing the price higher.

In the forex market, if the supply for a currency pair is high and the demand is low, it will drive prices lower. Conversely, if the supply for a currency pair is low and the demand is high, this will act to drive prices higher.

Through their actions in the market, the governments, banks, investors, funds, and speculators will determine the supply and demand of a currency pair. The key players in the forex market are constantly shifting the supply and demand of currency pairs, causing the price to fluctuate.

Zones

Supply and demand zones are created by interacting with the individual concepts of ‘supply’ and ‘demand’. You can visually see the supply and demand imbalances in forex on the price chart. As such, traders should be aware of these two critical zones within their charts.

The asset is the product in the forex market, and the rate value is the demand. Supply and demand zones are observable areas on a forex chart and indicate where a trader can place stops and limits from the vast data available. When representing data in a chart, traders can accurately identify the various supply or demand zones. These zones come up when there is an imbalance in buyers or sellers, creating demand or a supply zone.

Trading Rules

There are a few rules that you can follow regarding demand and supply forex trading. Understanding the reasons behind those rules is key to knowing how all of this works. The most common practice is to trade zones in the recent high or low direction.

Always ensure that the prices return quickly to the trade zones you are trading. Banks usually dump the zones if the market of those zones does not return to its initial stage within a day.

It is also better not to use old supply and demand zones for your strategies. They are likely to be less successful than newer and fresher zones.

Tactics 

Use forex indicators and a supply and demand chart to confirm support and resistance zones. Traders have to keep in mind is to exit when the time is right. One more tactic that traders often use is the spring pattern which works by finding a price direction in the opposite direction of the breakout.

Analysis 

The dynamics of supply and demand analysis in forex are pretty simple. It would help if you bought when the price action bounces upwards and sell when the price crashes downwards. The supply and demand equation is timeless. It will always be the simplest method of explaining why price changes. You get the theory based on analyzing zones in the past. These zones indicate where to expect the price to react in the future.

Pros and Cons

One of the unique things about the supply and demand trading system is that the price levels are always pre-determined, so you don’t have to do anything else other than set them up. It gives you a well-deserved break, so you don’t have to waste time constantly monitoring your charts and indicators to make the next trade.

Remember, you can’t trade forex using supply and demand as a standalone tactic. You have to incorporate it with other strategies and styles of trading. The only way to get this trading method right is to practice it until you have mastered it.

Summary

Supply and demand forex trading techniques have significant advantages and are not that complex. You have to figure out the supply and demand zones after analyzing the market trend based on your data from previous movements. Understanding why a currency pair moves is key to the development of every forex trader.

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