Understanding demand and supply is perhaps the most important aspect of Forex trading. Your ability to recognize the areas of demand and supply are paramount to your success in Forex trading. Traders who know the demand and supply dynamics are well equipped to understand the future and current price movements that occur in the Fx market.
What is supply?
Supply is the amount of how much a specific commodity is readily available at a time. The worth of a commodity is connected to its supply directly. With the increase of a currency’s supply, it becomes less valuable. And with a decrease in a currency’s supply, it becomes more valuable. Take rocks and diamonds as an example. Since rocks are available everywhere, they are not valuable. Conversely, diamonds are expensive as they are not available easily. Diamonds are hardly available, so you get them at a premium cost.
What is demand?
Demand is the amount of how much a specific commodity is required by the people at a time. A currency’s demand has a converse effect on a currency’s value than does supply. When the demand for any currency rises, it becomes more valuable, and when the demand for any currency decreases, it becomes less valuable.
To find the effects of demand on something’s worth, let’s take the example of Tickle Me Elmo. When launched, this toy was in high demand. Its high demand made it much more valuable. But if no one’s child wanted it, it won’t be such an expensive toy.
Tips to use supply and demand to trade forex
Below are the main tips to utilize supply and demand to trade forex efficiently and successfully for every level of traders:
- Use a longer time frame to recognize the demand and supply zone.
Traders can get a better idea of places where the price has bounced earlier by zooming out. Ensure to use the right charts when changing between different time frames. You can draw rectangular shapes to represent this zone. Supply and demand zones don’t have to always come together.
- Recognize solid moves off the prospective supply/demand zone.
Some price levels provide value either to bearish or bullish traders. When big banks and institutional traders notice this value, they try to make the most from it. Thus, price actions speed up promptly until the worth has been reduced or completely realized. Seeing its different instances at the same level increases the possibility that it’s a place of value and hence a demand or supply zone.
- Use indicators to confirm demand and supply zones.
Traders can include weekly or daily vital points to confirm or recognize demand or supply zones. Traders can search for resistance and support levels to find all supply and demand zones for high possibility trades.
Trading strategies for supply and demand
When it comes to supply and demand, there are two main trading strategies to consider. Let’s have a look at each of them individually:
Range Trading Strategy
Demand and supply zones are used for the range trading strategy if they are properly established. Traders can include RSI or stochastic indicators to help identify oversold and overbought conditions. When it comes to the trend, these are non-directional trends, so both short and long entries can be found. After seeing overbought/oversold conditions on long-term charts, the traders can zoom out to a small time frame and find a perfect entry.
It is another demand and supply trading strategy. Since price can’t stay in a defined range always, it will make a directional move eventually. So, traders try to get a favorable entry in the breakout’s direction in the market as it can lead to the beginning of a new trend.
Understanding how Forex demand and supply affect the Forex market is vital for becoming a successful Forex trader. It begins with knowing the concept, but the actual thing is understanding how to recognize the value areas so that you can start making the most out of them with the Best Forex Signal Provider’s help.