Supply and Demand in Forex: The Essential 2020 Guide To Supply And Demand Trading For Forex
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Supply and Demand in Forex: The Essential 2020 Guide To Supply And Demand Trading For Forex
Surely all of you have seen the price barely touching the support/resistance level, bouncing back and forth with great speed and drifting away. What was that? Most likely, you saw the work of the supply/ demand area. Today we will touch upon this aspect of Price Action trading. We will analyze what demand and supply levels are, how to find them on the chart, how they work and, of course, how we can benefit from this knowledge.
What is supply and demand in Forex?
If we pass on the basic idea of working with the levels of supply and demand in the form of one sentence, then we will get: "buy at the bottom and sell at the top".
Before we move on to the chart, let's first look at the theoretical part to better understand the subject.
Imagine you're trading in a vegetable market. The price of apples is currently 5 dollars per kilo. Approximately the same price is put by other sellers. At this price, apples are actively bought and no one has anything left. Let's imagine that some sellers decide to raise the price and put up apples for 6 dollars. Others raise the price accordingly. Buyers keep buying them, but a little less active. But still, in the end, all the apples are sold out.
The next day, having looked at it, some sellers decide that they can sell them for 7 dollars. Why not? People will buy them anyway. All the others repeat after them. Buyers start to be less active; half of the apples are sold out. But in general, the price remains profitable for sellers.
The next day a very greedy seller decides to put the price even higher and starts selling tomatoes for 8 dollars. The others look at him and do the same. But people stop buying.
Sellers then decide to reduce the price to 7 dollars. People continue the boycott and do not buy them. The price is falling rapidly to 6, but people still refuse to buy. And in the end, the price returns to 5 dollars. People are satisfied as everything is as it used to be. They are ready to buy again.
In this example, we have a level from which we buy well. That's 5 dollars. The price from it started upwards, went down to 8 and quickly went back down to 5.
The level of 5 dollars - a level of demand at which demand is active, that is, there are good sales. And the price of 8 dollars is the level of supply, which has accumulated a huge number of people willing to sell apples. But there are no buyers there and therefore the price drops very quickly.
In the end, it turns out that the price of 5 dollars was a level of demand, and the price of 8 dollars was a level of supply.
Looking at this example, we can pay attention to the imbalance that occurs when prices rise and get the strongest push.
This happened at the level of 5 dollars when we have a huge demand and there is not enough supply, because all apples are sold out. That's why the price rises very quickly upwards. And the same happens at the price level of 8 dollars when we have a lot of supply, but there is almost no demand. That's why the price is moving downwards. Thus, we can conclude: when the price moves down, we have more supply than demand. And when it goes up, there is more demand than supply. Because of the imbalance of supply and demand, the price either rises or falls. That's what the work with supply and demand levels is based on.
How do you find Forex supply and demand?
To find supply, we will look at price peaks, and to find demand, we will look at troughs.
We need to mark the peaks and troughs with fast and strong price movements. Fast growth for demand and recession for supply. The lower the price stays at the level, the better for us.
The first thing we need to do is to look at the highs and lows in the current chart, just as we do with the support and resistance levels:
Note that the closest area to the current price has been tested several times. And the lower one has not been tested yet. It has only been touched once, so this area is stronger than the one that has already been tested.
At the marked levels, we see that the price was not tested for a long time. It reversed almost immediately and went down with big candlesticks. Here the important factor is the time that the price "did not spend" at the level. The less time the price was at the level, the more significant this level is. And you should remember the size of candlesticks. The bigger are these candles, the stronger is the reaction.
Also, the levels of supply and demand are mirroring. Just like support and resistance.
If we pay attention to the last highlighted area, we can see that first there was supply and then a strong breakdown:
The price has surpassed the supply, took its leftovers and rose higher.
And now this area has become an area of demand:
As you can see, there was a quick bounce from it.
Our task is to determine the demand for the troughs, and the supply at the peaks.
We find strong and fast price movements on the chart. Growth for demand and decline for supply. It should be large candlesticks and the price should not crowd in one place for a long time. There shouldn't be a long trade. The less the price spends at the level, the better.
How do you trade supply and demand?
Supply and demand Forex strategy is based on the imbalance of their correspondence. Big players set up limit orders (buy/sell) for execution in these zones. Buy and sell orders are in the supply and demand zones accordingly. Here they collect orders placed by small players. It is not so easy to open large positions unless the price changes significantly.
As soon as the price arrives in the Bid/Ask area, the execution of orders of big players begins. When collecting orders opened by other market participants, they close their own. After that the price starts its movement - it either rises or falls, depending on the order processing zone.
If not, all orders have been satisfied, the price will return to this position. It will test the Bid and Ask levels until all the orders have been processed. At each repeated testing the level becomes weaker, the probability of its breakdown by new price increases.
Forex Bid and Ask zones bring profit to everyone who knows and understands the game rules.
A trader who takes into account Bid and Ask levels in his strategy will easily determine on the chart the zone from which the impulse price movement started. This analysis will allow him to quickly and accurately predict its future direction.
What is an imbalance in Forex?
Deep analysis of the quotes history of the selected asset allows us to understand that at some moments the strength of one group of traders significantly prevails over the strength of another. Such areas on the trading chart are usually called imbalance levels in Forex. Practice shows that these levels are the cause of impulse price level movements, which in the presence of certain skills can be successfully used for high profits.
It is important to understand that with comparable values of supply and demand levels on the trading chart there is a kind of balance, as a result of which we can observe the state of flatness when the price level changes within a fairly narrow price corridor. If the volume of supply or demand increases significantly, then we can observe the price impulse on the chart. After the appearance of such an impulse, the price will move in one direction or another until the balance is reached again. An additional reason for the emergence of imbalance in the currency market is unexpected changes in various macroeconomic factors. Sometimes the emergence of imbalance on a particular currency pair is hindered by various artificial measures that keep the quotes at a stable level. As soon as these measures are no longer applied, we will be able to observe a rather strong price impulse in one direction or another, as the price will try to reach the balanced state as quickly as possible.
It will be useful to know that if the imbalance is suppressed by artificial measures, the peaks and troughs will be at different levels during the flotation. In this case, if you build a regression line on a similar section of the price level, it will necessarily be horizontal.
The described levels of imbalance are the concentration of supply or demand. For this reason, as soon as the price reaches this level, the selected currency pair will start to actively buy or sell, resulting in a price impulse on the chart.
A trader who takes into account the applying of supply and demand in Forex trading strategy will easily determine on the chart the zone from which the impulse price movement began. This analysis allows traders quickly and accurately predict its future direction. By thinking like a big player, he reduces the risk of being eaten by other big players if a false breakout occurs.
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