Guide To Understanding Supply and Demand Strategies For Forex Traders - ForeXposed

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Thursday, May 25, 2017

Guide To Understanding Supply and Demand Strategies For Forex Traders

One of the things that must be understood by forex traders before entering the forex market is to know the reason why the price is moving. Once you understand this concept then you would be more logical to do trading in the market.

The main reason why prices move was due to an imbalance of supply and demand in the market at any given time.

On this forex articles, we will expose how to identify supply and demand zones and how to apply the zones in forex trading process.
Guide To Understanding Supply and Demand Strategies For Forex Traders

The Supply and Demand Concept in Forex Trading

The main key in this forex strategy is Supply and Demand Concept. Simply put, Supply and Demand Rule is when supply exceeds demand then the price will go down. Conversely, when supply is reduced then the demand will rise.

This theory is very easy to understand and can be used in various kinds of trading. Become a rule that can be used in a variety of markets.

This supply and demand strategies very well used to analyze currency pairs. When supply for a currency is rising then the demand will go down, and in the forex chart will show a decline. Vice versa, when supply for a currency is down then the demand will go up, and in the forex chart would look hike.

The increase or decrease in supply or demand on a currency pair determined by all forex traders in the forex market. They are governments, banks, hedge funds, investors, and speculators.

They are the ‘big players’ that make the price moves in fluctuate, resulting in forex traders constantly shifting the supply and demand in their forex trading. Similarly, when you get to the spot market through forex online, you include the people who participated changing the price movements in this market.
Guide To Understanding Supply and Demand Strategies For Forex Traders

Understanding Supply and Demand Zones in Forex Trading

Visually we can see an imbalance between supply and demand for currency pair via price action in the forex chart. Any change in the price shown on the graph represents the change in the perception of traders against currency pairs.

For professional traders will very easily see the bias of the forex traders when the price moves to a certain level. For example, when a currency pair decline in a downtrend, most traders will take a position of pending buy orders at a level below the price.

These people are convinced that prices will not go down to the bottom of the buy limit order. Therefore they put buy orders at this level assuming that the bearish moves will stop and changed to bullish moves.

When there are many people who think like this, and even the big players (large institution) also do like this, then it will happen the accumulation of big volume of pending orders at this level.

This incident resulted in rising demand when the price reaches this level, being the cause of the sharp changes when the price reaches this area.

Vice versa, when there are big volumes in the phases of accumulation at a particular price level above a certain price, will be an increase in supply, which resulted in prices falling rapidly when the price touches the supply areas.

A wise trader must know this two areas (supply zone and demand zone), where normally the price changed direction here, rise or fall.


Demand Zone or Demand Area

A demand zone or demand area is price area that lies below the current price, where there is strong buying interest (strong demand).

The chart in the image below shows that there is strong demand (buying interest) at the demand area, caused by the big volume of buy orders resting at this demand level areas.

While price action touching this demand level, look much the orders get executed, and also many visible volumes of pending orders that gets absorbed occurs.

In the forex chart will usually look sharp price reaction at the demand area. The more pending orders are resting in this zone, the more the price sharper reaction is shown in the chart.
Guide To Understanding Supply and Demand Strategies For Forex Traders

In the picture above you can see on the H4 time frame of the USD/CAD pair happens strengthening demand area between 1.2400 and 1.2360. Take a look at that every interaction that occurs in this area resulted in a price increase.

You have to understand that demand level is a zone or area, not just a single line on the chart you are using.


Supply Zone or Supply Area

Supply area is the antithesis of demand area. Supply zone or supply area is located above the current price action. In these areas, there is usually a large volume of sell orders. When the price moves and reaches this area the orders will get executed.

In this area, the forex traders doing the selling action and here the prices are experiencing a reverse to the downside. Supply area is a zone or area, not just a single line levels.
Guide To Understanding Supply and Demand Strategies For Forex Traders

In the picture above is the H1 time frame of the GBP/USD. There was visible supply chart area. When this area interacts with the price then the price drop occurs. When the price reached supply zone then reversal direction occurs.

These supply and demand areas are used by traders who use price action as a reference for his strategy to put orders in accordance with the direction.

When prices move towards the demand area and then bounces upwards, then the traders will be taking long positions (bullish).

So also when the price moves toward the supply area and then bounces downwards, then the traders will take short positions (bearish).


Guide to Draw a Supply and Demand Zones

As a forex trader, you should routinely to drawing supply and demand zones on your chart. This will make it easier for you to use this forex strategy and makes it easy for you to determine the direction of order positions when the price was at supply and demand areas.


How to Find Supply and Demand Areas in Forex Trading?

This is a question frequently asked by beginners traders who are interested in this strategy and trying to learn to trade forex in the best way.

The easiest way to find supply and demand zones is to look directly at the forex chart. Zoom out your chart, by doing that you will be easier to see the overall price action more clearly.

Then search the state prices where price action does the turning points, sharply. It’s area where the prices move sharply away from the area level and headed towards the bottom, and this could be called as a supply area.

Conversely, when the price moves sharply from the area towards the top, these level areas can be referred to as the demand area.

On the chart, when you find the turning point areas, draw these areas with the rectangular shape and drag it to the right, using the tools that are on your trading platform.

If you do not want the hassle, you can use supply and demand indicators to drawing these supply and demand areas, automatically.

In the picture above, you can see the Weekly timeframe for AUD/USD which showing supply zone.


Supply and Demand Analysis in Forex Trading

Forex supply and demand strategies is a very simple strategy but very powerful to trade forex. With this strategy, we will know how to trade forex with simple way, and this trading method is the most appropriate strategy to the realities that exist in every market.

The supply and demand analysis rules in forex trading are quite simple. You just need to do a 'buy action ' when the price approached demand zone and then bounces upwards. Do 'sell action ' when the price approaches the supply zone and then bounces downwards.

For stop loss, you only need to put a stop loss just below the demand zone when you take a 'buy positions'. As for 'sell positions' you just need to put a stop loss just above the supply zone.

After that, you need to wait (hold) your trades until the price reaching supply/demand zones.

When you do 'buy action' then you just need to wait (hold) your positions until the price was hitting the next supply areas.

Conversely, when you do 'sell action' then you just need to wait (hold) your positions until the price was hitting the next demand areas.

However, often the price is not exactly hitting the profit target, therefore you need to use tools such as forex trend lines, channels, or other such tools, which use price action as the base, to be able to precisely determine the exit level/profit target appropriately.


Reference: Forex Training Group.