How to Use Support and Resistance to Trade Forex Supply and Demand - ForeXposed

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Friday, May 5, 2017

How to Use Support and Resistance to Trade Forex Supply and Demand

As we know from previous articles, that supply and demand have a major impact on prices in the forex market. This is a very important thing to understand, because it may be difficult to clearly understand this occurrence in the forex trading. In this article, we will explain how to use support and resistance in supply and demand strategies. After reading this article, we hope you will get a lot of profitable forex trade than before.

What is the Supply and Demand in Forex Trading?

The supply is an amount of something which available at a particular price, while the demand is the amount which is desired or wanted at a particular price.

The price of instruments or products has a very large effect on the availability of instruments for the financial markets.

When the prices are rising, the sellers who were not willing to sell goods that he had also experienced a rise. This is commonly referred to ‘supply curve’. And then described how there are additional units (shown on the vertical axis) when the price is rising (shown on the horizontal axis).
How to Use Support and Resistance to Trade Forex Supply and Demand

In the picture below looks to the buyers which want a price to be more down again. When the prices are rising, the demand will slowly decline.
How to Use Support and Resistance to Trade Forex Supply and Demand

The Real Fact of Supply and Demand

As an example, let's create an illustration. When you have routine tasks in your family to buy goods, then you create a list of items you will purchase. In the list that you wrote down, the steak for grilling weekend is on top of the order. Then one day you go to the market and found that the price of steak rises twice (doubled). If you still want to buy a steak, then the cost you have to pay for buying the steak will be increased. Finally, you thinking that the steak price is too high. Then you try to look for other alternatives as a substitute, i.e., hamburger or chicken; that way you get a product that has a similar value and is more comfortable in cost.

Although it is possible that individually, you do the opposite, i.e. such still buy steaks with double the price, but we have to understand how the psychology of the market work. That not all steaks buyers willing to do this (buying with double price), and most of them will choose to buy another product as a replacement.

This is a real example of how demand curve applies. When the price of an item increased then the request down.

OK, let's makes a different example. Let's say you go to the market and thus you find a case that on the contrary. The price does not go up twice but instead went down to half or quarter.

Noticing such changes, you will have a different mind from last week.

Maybe you just think that if you buy additional steak for one week for your family surely will make you and your family more satisfied.

You might also imagine if you buy more steak of course your wife will be happier because he is very fond of steak. And finally, you decided to buy more steak, while the price is cheap.

But when you're thinking about it, you see a lot of people like vying for buying steaks, fulfilling their baskets with steak. They also thought the same as you, as long as the price is cheap, buy up as many steaks. And then you are in a hurry to join the people to buying steaks while the price is still cheap.

This is an example how demand occurs. When the prices are decline, the demand will increase.


Combine Supply and Demand with Forex Support and Resistance

Examples of steak are no different to what is shown in the forex trading chart. Let's makes an example using GBP/USD.

On the forex chart, we know that the price is never being at 1.5230 since July of 2010. Several times the price trying to approach the area, but never managed to broke it.
How to Use Support and Resistance to Trade Forex Supply and Demand

As seen in the chart on the picture above, is seen several times the GBP/USD is under 5230. But it is always followed by bullish towards 1.69 area.

The case of price is below 1 .55 on GBP/USD was look like a steak that is sold with 75% price off. At this conditions, the buyers will tend to buy up because they think the price is cheap.

The support is a point where demand exceeds supply, resulting price to increase.


How to Use Supply and Demand Curve

All that has been described above is based on the assumption that all running as it is. But the reality is not so. Everything will change, as happened at the price.

Let us imagine if Mad Cow disease outbreak in your country. Although the price of steak is very cheap but looks very risky If you still buy the steak. Maybe you get the price steak in the grocery store decline to 75% than a normal price, but the price decreasing was unable to attract buyers to purchase it.

This shows that there have been fundamental changes which resulted in a massive change in the market. This change is not in such case when the bad data of NFP is released led to temporary changes in the market.

To overcome it, the grocery store could just continue to lower the price of steak until buyers felt that the risks taken in buying the steak might be infected with Mad Cow disease is worthy enough the discount received.


Breakout in Forex Supply and Demand Trading Strategy

Analyzing the price will experience a breakout is a thing that not easy for forex traders.

When you get to the forex market, the thing you need to do is decide whether you will do breakout trading or trade for range. That way you're more likely to take buy position or a sell position.


How to Range Trading

When you decide to trade for range, then the things you need to do is take a step when prices remain on the same trend. With the support and resistance line, it will make easy for traders to take the decision to 'buy' or 'sell'.

See the image below. Seen that a forex trader simply use the price itself to identify the exact position in taking buy positions or sell positions.
How to Use Support and Resistance to Trade Forex Supply and Demand
How to Breakout Trading

In addition to the trading range, another type of trading is breakout trading. In this trading type, the traders will open position when the price moves broke through support or resistance and make a higher high or lower low.
How to Use Support and Resistance to Trade Forex Supply and Demand

Reference: James B. Stanley (DailyFX)