Forex Supply and Demand: Overbought/Oversold? - ForeXposed


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Thursday, February 23, 2017

Forex Supply and Demand: Overbought/Oversold?

The Market work is to make the prices in accordance with supply and demand. If the price is almost always the same as the demand, how can the prices named to overbought or oversold?
The price may be expensive, but the word "expensive or cheaper" is relative. For example; you buy a painting by a not famous painter, costing 100 USD. Next week, the painter appears in art magazine covers, and his work began to be known publicly so that painting you have now is worth 500 USD.

Most people consider the painting is expensive, overbought, because its value rising drastically. What if then a collector bought the painting with the price of 10 million USD? All indicators will say that prices are overbought, due to the high rise in a short time. The true fact is a supply and demand equilibrium is at a new level, whatever the reason.
In an efficient market, though not perfect, there is no term of overbought or oversold. Prices are on one level, as indeed he should be at such a level.
You look at it from any angle, the market remains running as efficient as possible. If you get the profit, on the other hand, there were those who suffered losses. The number of supply and demand which took place called volume, and this is a fact. Price and volume are absolute and the fact of the market, because they are not distorted.

Thus, the indicator used in the technical analysis generally distorts the price and volume. Most of us in observing the chart, especially if using the indicators, is often too focused on motion indicator than the price action. But it has been very clear that indicators are derived from price and volume.

Take a look at the following chart:
Forex Supply and Demand: Overbought/Oversold?

Notice how both the stochastic indicator or RSI shows the signal to enter the oversold area (red vertical line). If you only focus on an indicator, you will lose the momentum. And this will have an impact on your doubts to take decisions. Look at that point with vertical blue, you will be the more confused, the price is called "oversold", but continues to fall.

If the decision-making is dominated by indicators, I believe the decision taken will be much distorted. A trader should put his intellect forward when he saw the moment of shifting of supply and demand (at the breakdown chart of two flat-line) that cause the price to out of range, before.

If traders see Samsung smartphone prices start to going down from the normal range, he didn't have to look in all directions and trying to sell at expensive prices. For sure, he will lower the price, especially if the stock is still a lot, it's better to follow the new price, rather than unsold.
Forex Supply and Demand: Overbought/Oversold?

Well, if you want to use the indicators, put it at the position it would have. The forex indicators must adjust to the price, not vice versa. Note, when the price drops back from previous moves up which started from the red vertical line and enters the previous supply and demand areas (vertical blue), you are welcome to see the indicators. And if the indicators stated ‘overrsold’, then you have a chance to getting a big profit by doing a pullback entry.