Market Supply And Demand

Market Supply And Demand

When you understand supply and demand and learn how to blend it with price action and the interpretation of market stages and structure in deciding trades, you’ll have a better edge in the market. Wherever there’s anything to do with buying and selling, it’s all about demand and supply, nothing else. You can’t buy what’s not availed. And you can’t sell what is not demanded.

 

Demand and supply is what moves prices in the market. If you’ve done a bit of economics you must have come across the saying “the higher the demand the higher the price” or “the higher the price the lower the demand”. Higher demand drains the supplies on the market quicker leading to the rise in prices born out of scarcity. Simple concept, isn’t it?

 

When supply is less on the market, there’s an imbalance between supply and demand as demand becomes significantly greater than what’s supplied. This drives prices through the roof as buyers scramble to get a piece of what is scarce. The reverse is true. When there’s more supply than demand, prices tank as sellers seek to entice buyers with attractive prices.

 

Buyers Vs Sellers

This is exactly what happens every day in the forex markets as well as other financial markets. This imbalance in supply and demand is the sole reason why price moves in every market, whether it be it forex, cryptos, indexes, commodities or stocks. The greater the imbalance, the greater the move in prices. That’s why you’ll find impulsive moves and corrective moves of prices.

 

An area of much supply refers to an area of much selling pressure. Its this selling pressure that causes a market’s price to fall. This on the other hand, area of increased demand refers to an area of increased buying pressure. This area of increased buying pressure causes a market’s price to rise.

 

If the supply for a currency pair is high and the demand is low, it will drive prices lower. If the supply for a currency pair is low and the demand is high, this will act to drive prices higher. The supply and demand of a currency pair is determined by the players in the Forex market

 

There are numerous players in the financial markets placing different kinds of orders, big enough to bring about these imbalances. Such players include Central banks, investment and commercial banks, institutional traders, hedge funds, and retail traders. All these traders in the market place seek to buy at a price they deem fair and to sell at a value they deem worth. So they each have a different perception of fair price and future value.

 

Like I said, if the knowledge of this is combined with the understanding of price action and market structure interpretation, your edge in the markets is increased exponentially. Price action will help you understand what traders are doing as far as reaction to supply and demand is concerned, while market structure will help you identify areas where the supply or demand is greater or lesser than the other.

 

You need to know how to identify areas of demand and supply and this requires technical understanding.  So many factors play in determining the importance and strength of such areas. There’s no clear pin-point price at which one would say is the best point for a buy or a sell. Why? Because you will never have a specific perfect pin-point price but rather an area or a zone. That means you consider price that’s within a particular zone and not necessarily a particular point.

 

 

These areas are commonly known as support and resistance, with support being the area of demand and resistance being the area of selling. Of course it isn’t as simple as it sounds, but that’s the general idea. An area of increased supply refers to an area of increased selling pressure. This selling pressure causes a market’s price to fall.

 

These areas of support and resistance provide buying and selling opportunities. Properly identifying them could be one of the keys to your trading success.

 

How To Identify Demand And Supply Zones

Use Of Trend Lines

These are ascending or descending lines that join one swing point to another. These lines help you predict particular areas where of price change during trending periods. They help you spot early the change in trends and catch the next big market moves ahead of the crowd.

 

 

Use Of Support And Resistance Lines

I’ll use this in reference to horizontal lines. These help mark out areas between which price is oscillating. They define market levels and identify price points on a chart where the probabilities favor a pause or reversal of a prevailing trend.

 

A number of strategies are applied by traders in trading these areas including bounce trades in the case of price reversals following rejections in other words known as range trading, breakout trades in the case of price breaking out of ranging markets, pullback trades which are retracements or retests of breakout area

 

 

Use Of Candlestick Formations

This helps you know how price is reacting at an area to be able to know what traders are doing. For example, a bearish pin bar in area of supply is a sign of reducing buy pressure and an increase in the selling pressure. This increases the likelihood of prices falling and so you wouldn’t want to buy at such a point and if you were already in a buy position then you need to manage it through moving your stops or closing out partial positions or both. The opposite is true with bullish candle formations at areas of demand

 

Use Of Technical Tools Like The Fibonacci Levels And Pivot Points

These help in identifying areas of potential price changes or reversals and can also help to fairly accurately predict next points of price movements. This helps traders in deciding areas of entry, stop losses and targets.

 

Use Of Technical Indicators Like The Moving Averages

These help in predicting change in momentum and trends. They are lagging compared to price action which is real time but the combination of both creates a confluence of factors which increases your odds and solidifies an area of price reaction as strong and more reliable.

 

This improves your edge in the market because so many traders are looking at such confluences. This increases volume in the market as traders come in creating volatility which is necessary for trades working out.

 

After identifying demand and supply areas, you combine your choice of tools and indicators to determine the area where there’s the most confluence of the all the tools combined. The area of most confluence has better odds of trades working out. This is because different traders both retail and institutional use at least one of the many technical tools and indicators in their daily trading decisions. Therefore, trading with a confluence of them gives you a better edge

To learn how we combine all these to trade with amazing levels of accuracy in the forex markets, consider joining the forex school where we train and trade with members the ideas we teach to help them become profitable

 

Godfrey Kakulu

Your Forex Trading Coach and Mentor

Professional Training and Education in Forex, Cryptocurrencies, Indexes, Commodities and Precious metals

 

 

Godfrey Kakulu

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