The main features and challenges of trading for demand and supply in Forex
The supply-demand relationship underpins the price behaviour of forex currency pairs. It determines the existence and functioning of any market.
For the trader, the current price behaviour is a decisive factor in determining its future movement. Demand, which dominates supply, will drive the price up, while the opposite will cause it to go down. By understanding where the supply and demand levels lie, the trader greatly increases the percentage of his successful trades.
Sellers strive to sell at the highest price to achieve the highest profit. Buyers, based on personal gain, want to buy at the lowest prices. This contradiction is the basis of the market price formation. At Forex, the world’s largest financial marketplace, this contradiction is particularly pronounced.
Trading from supply and demand levels
In the process of learning how to trade, beginners spend a lot of time on technical analysis. Their understanding of supply and demand zones is limited to resistance and support levels.
- A support level is a price level around which strong Buy positions are concentrated, passing through the two lowest price levels.
- Resistance level is a price level around which strong Sell positions are concentrated, passing through two maximum price values.
On both sides the number of positions can be so large that they can not only stop the trend, but also reverse it in the opposite direction. The strategy of trading for demand and supply in Forex, is based on an imbalance.
Principle of trading
Large participants set limit orders (buy/sell) in these areas for execution. To buy in the demand area and to sell in the supply area. Here they gather the orders placed by the smaller players. Large positions are not easy to open unless the price changes significantly.
As soon as the price arrives at the supply/demand area, the orders of the big players begin to be executed. By collecting the orders opened by other market participants, they close their own. After this the price starts its movement — it either rises or falls, depending on which zone the orders were executed in.
If not all of the orders have been satisfied, the price will still return to this position. It will keep testing supply and demand levels until all of the orders have been executed. Each retest weakens the level, increasing the probability that it will be breached by the new price. A trader who takes supply and demand levels into account in his strategy can easily identify the zone on the chart from which an impulse price movement has started. This analysis will enable him to quickly and accurately predict its further direction. By thinking like a big player, he reduces the risk of being eaten by other big players in a false breakdown.
