Forex Supply and Demand: Back to Basic - ForeXposed


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Sunday, February 19, 2017

Forex Supply and Demand: Back to Basic

Do you still remember the two main characters whose name is often mentioned in the economics and physics world?

He is Adam Smith, pioneer of modern economics and a pioneer in the economic system of capitalism. Adam Smith has stated that hundreds of years ago; if at a certain price level; supply exceeding demand, then the prices will fall. Vice versa.

While the second figures are Sir Isaac Newton. He stated on the Law of Motion; the object will remain in motion action until it gets a force reaction which is equal or greater. This law often called ‘Action and Reaction’.

Both simple but brilliant example has been proven throughout time, and become the major factor in price movements in the market that we trade. If they choose a career as a trader, may be they will become reliable traders. :D

The focus of this article is on what is called in the conventional technical analysis as a support (demand) and resistance (supply). We'll try to dig deeper into what exactly the support and resistance level is. How do we identify and quantified on the chart. And how to use them in making objective decisions which generate profitable trading.

A trader should understand, the market mechanism is no more and no different than other markets. Whether the stock market or the fish market, we shall see how the law of demands dealing with human factor involved in it. This is the main driver behind the price of goods. The opportunity arises when this simple relationship becomes unbalanced.

The supply and demand interaction is always there in every moment. If we can identify the existence of supply and demand, of course, it is not difficult to identify when the prices will reverse direction.
Support (demand) is the price level which more buyers than sellers are willing to buy at a certain price level. Resistance (supply) is where the availability of supply is more than buyers that willing to buy the supply at a certain price level.

Look at the chart below to identify what is demand meant.

Forex Supply and Demand: Back to Basic

The (A) area showing the price level where is relative balance or equilibrium between supply and demand. Everyone who wants to sell and buy at the price level is still within the limits of the balance, and the price is relatively stable.

In closing candle (B), the relationship between supply and demand has shifted and no longer balanced. Now we know, more demand at price level than the supply availability.

How do we know if this is true? The only thing that causes the price moving up as in the example above is due to the shifting relationship between supply and demand.

In closing candle (B), we can conclude, there are buyers willing to buy at the (A) level, but is late, because the price has gone up. Now, we can call (A) area as demand (support) area.

Label (C) showed a decrease in prices, back to the level of demand. And this is where we got the chance to gain high reward/low risk trade, as prices return to areas where previously shown the buyer domination.

We will discuss how to capitalize on these opportunities, later.

Then we can identify supply (resistance) by inverting the logic of the above examples.

Forex Supply and Demand: Back to Basic

Identifying true demand (support) and supply (resistance) price levels are probably the most complicated in trading decisions. Where roughly the price will probably reverse direction (turning point), and why the reverse happen.

The definition of demand and supply that I have mentioned above is the only information we need. Adam Smith made it simple, logical and real. If the theory is applied to the market, then everything will clear.

In fact, the only objective information available is the price and volume. While others are merely derivative of price and volume. So why not directly to the source?

We've read many books and hear financial commentators talk about Moving Averages, Fibonacci Retracement, and so forth, as the demand (support) and supply (resistance). These indicators have a point, but not entirely correct. All indicators or oscillators are referred as mere tools in identifying support/resistance. Is just tools to indicate the specific conditions of these tools and not show the actual supply and demand. These tools only work if the conditions are exactly the same as the level of supply/demand in the chart.

Can you imagine, if the financial director of Microsoft whose shares are listed on the NYSE or George Soros fund manager spoke about oscillator or head and shoulder candle pattern? Improbable.

I’m not antipathy to the trader who uses indicators, not at all. But I remind, these indicators are merely tools, then do not get hung up on tools. Go to the source, namely price and volume.

For example, if we go shopping, as well as any desired goods, which most often appears first is the phrase "how much?"

That's why the title of this article is “Forex Supply and Demand: Back to Basic”. Let's try again to understanding the mechanisms of the market itself.

Before proceeding, I would like to quote a newspaper report on The UK Telegraph:

This morning the UK Telegraph Reported that Pimco, the world's Reviews largest manager of bond funds, will not buy British debt this year. They are fearful the Brits may be Able to efficiently market enough Reviews their gilts to fund current deficits. Pimco hinted they may reduce Reviews their current inventory, selling some of Reviews their gilts. A Pimco Spokesman was quoted in the Telegraph: "Paul McCulley, a managing director at Pimco, said: "We are currently cutting back in the US and UK Because supply and demand dynamics are Likely to be negatively affected as borrowing rises and central bank buying declines."

Now you can see for yourself, how aspects of supply and demand are the main factor in decision-making.

In a previous post, I mentioned: "Identifying true demand (support) and supply (resistance) price levels are probably the most complicated in trading decisions. Where roughly the price will probably reverse direction (turning point), and why the reverse happen."

How do I identify the entry area of low risk / high opportunity, as simple as possible? Let us try to do the simple steps below:

    1. Open your forex chart, the Daily or Hourly time frame.

    1. Look at the left side of the chart, and find out if there are areas where is a row of candle/bar, the neater the better. This shows the balance/equilibrium, so it looks like motion prices within a limited range.

    1. Put a horizontal line between the earlier range, we recommend using only candle body.

    1. Observe, if there is any candle/bar which the body closing exceeding this row, the higher the better.

    The area between these two lines is the reference that we will use as a base for the decision of buying/selling when the price is re-entry/approach this area again.

    Not necessary to 100% perfect in lay down horizontal lines, because your accuracy will be trained over time. By practice and repetition constantly, you will more easily to identify it.

    Examples Supply and Demand Area:

    Forex Supply and Demand: Back to Basic

    Forex Supply and Demand: Back to Basic

    Try this simple strategy in your forex trading!


    1 comment:

    1. […] (turning point). There are several strategies that can be used to take advantage on the shifting equilibrium of supply and demand, which is also triggered by human emotions such as Fear, Greed, and […]