Forex: Using Price Action To Identify Supply and Demand - ForeXposed

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Wednesday, May 31, 2017

Forex: Using Price Action To Identify Supply and Demand

If you want to find the supply and demand in the forex market then take a look at the chart carefully. You will find a variety of sell orders and buy orders across multiple price levels.

That way, you will easily find the supply and demand.

Then, whether it is useful? I don't think so.



Do you want to find supply and demand locations?

Location of supply and demand in the forex market is always constant. Often, market participants always want to buy at different prices. That way, the location of supply and demand will always change. So, you no longer have to search for it.



What you need to search for references in forex trading decisions is price areas (price zones) where demand exceeding supply or supply exceeding demand.



- Supply area is called resistance. Where when the prices touched resistance then the prices will fall. Here your chance to sell orders.

- Demand area is called support. Where when the prices touched support then the price will go up. Here your chance to buy orders.



So, the fact that we are looking for is market turning points, not supply and demand. How to find it? Use the three steps below to get it.




  1. Always focus on a price level (price zone).




When you analyze the market without a focal point then you will have trouble. You'll feel confused if you analyze each turning points at each level in the market.

Then, the question is whether or not you already know the price level where we need to focus on it. The price level that could potentially be a turning point in the market?

There are many ways to get the turning points that have potential. There are several tools that you can use to find turning points. Among these are Fibonacci levels, the volume, swing pivots, pivot points, etc. Use this tool to find turning points is much easier and makes more sense.



Example how to find turning points in forex trading.

I will use a valid swing pivot as a tool in the following example.



Looks valid swing low on the 5 minute chart time frame above. Always pay attention to this area to find out the effect of the demand.




  1. Always pay attention to what is happening in the areas that could potentially be a support or resistance.


A. The presence of the signs of strong demand.

Note the following when the market tests the support:

-The emergence of bullish price pattern.

-The price is not able to enter in full to below support areas.

-The occurrence of increasing price.

-The occurrence of congestion.



B. The presence of signs of strong supply.

Note the following when the market tests the resistance:

-The emergence of bearish price pattern.

-Prices are not able to enter in full upward resistance areas.

-The occurrence of increasing price.

-The occurrence of congestion.



Look at the price action in the past and present, the more you see the truer the signals of a support/resistance areas.

For example, look at the 5 minute time frame on the picture below to find the price action.







1 - When there is volume increase when the prices visit price area, it indicates that an increase in demand.

2 - The occurrence of formation of the bullish pattern when the price tested the support area.

3 - Clearly, that the price is difficult to close in or under the support area.

This indicates the demand will exceed supply in the area.




  1. Limit your risks with risk management.




When you've found what you think is support or resistance levels, then you should know that it is only a tendency, not a certainty to be guaranteed.

In order to always secure in your forex trades, you should limit the risks when you trade using forex supply and demand strategies. You can use two ways to doing trade with this strategy.



First Way: Demand Confirmation.

Let the price to execute your orders. Observe and analyze price pattern, then use the stop orders. Let the price executes your orders when all goes according to your analysis.

In this way, you are going to be late to get into the forex market, but it's better for you because it will be more secure for you when you losing in the trade. The downside of this forex methods are you going to get in the market while the price is already running, so the advantage you get is becoming less.

Preferably, use this forex strategy only when you predict that the profit you can get is quite large. Or at least, the risks for losing trade is quite low.



Second Way: Aggressive Trade.

Entrance to the market early, without the need to wait for a confirmation with a tight stop loss and the target is conservative.

Preferably, use a limit order and place it within support/resistance areas.

The second way will be very suitable when the following conditions are met:

- You are very confident about the condition of supply and demand.

- You do not know how far prices will move.



Examples

On M5 time frame as shown in the previous image, the support looks very strong. In this case, we are confident that the bearish moves will stop.

But considering the price have fallen quite long, presumably not good if we set targets too high because it's will against the trend that is running.

For cases like this, it seems to be more suitable if using aggressive way of trade.







Using a consistent stop loss of 2 points for profit target will be very good on both types of trade.



Understanding Supply and Demand Interactions With Price Action

In understanding supply and demand strategies for forex trading, we must study its interactions. Like the following:

- Are in this price levels the demand will exceeding supply?

- Are in this price levels the supply will exceed demand?

- What is implied by the price to us about supply and demand?



These questions are what we should think for using the three steps that I have described above.

The example I have pointed out above is an example of a contextual market that can help you understand how to trade using this forex method.

What you need to pay attention is don’t focus only on the definition of support and resistance, but rather focus on learning price action so that you are able to see the fight between supply and demand.



Reference: Galen Woods at Trading Setups Review.