Demand and supply is a classical theory of economics, but some traders use the forex price action demand and supply strategy.
Maybe for those of you who are hearing it for the first time. You are a little confused about how to apply the price action demand and supply strategy. Hopefully, this article will help you understand how to trade demand and supply price action.
Because this strategy is actually very simple but has the potential to provide good trading gains by implementing good management.
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Price action explained
The first thing I explain here is about price action. In forex trading, the definition of price action is a way of analyzing market movements by utilizing candlestick patterns that react to prices.
So pure price action uses candlesticks without using indicators such as MA, MACD, RSI, and others. Some people might call this a naked trading strategy.
So if someone mentions using naked trading, it is similar to a price action trading strategy. It’s just that maybe the way to read candlestick patterns from each trader is different.
Demand and supply forex
Furthermore, about forex demand and supply, but to make it easier to understand how the concept of forex trading demand and supply. We first understand the meaning of demand and supply.
Even though you may already understand, it doesn’t hurt if I repeat it again.
Basically, demand is the number of goods needed by many consumers at one time. And supply is the number of goods available at one time in the market.
What is the relationship between these two terms? Let’s start with a case example. If an item has an increase in supply, while the amount of demand remains stable. Hence from the merchant’s point of view, there will be no cycle of exchange of money and renewal of goods, or in other words, he loses money because the goods are not sold.
Because the inventory of goods is too high, it can be worrying that traders will reduce prices so that buyer interest can rise again. Conversely, the lack of availability of goods and high demand will increase the value of these goods.
Are demand and supply inversely related?
To see the relationship between demand and supply, perhaps through the illustrations below it will be easier to understand.
From the illustration above, we can draw four conclusions about the relationship between demand and supply to prices.
- If the demand for goods increases while the availability of the number of goods(supply) does not change, the price will rise.
- If the demand for goods decreases and the availability of goods (supply) does not change. There will be an accumulation of goods which causes prices to fall.
- The third condition, if the demand for goods is stable, and the supply of goods increases, there will be an accumulation of goods which causes traders to reduce prices.
- The fourth condition, if the demand for goods decreases and the supply also decreases, the availability of goods will be less and the price will rise.
Example case supply and demand forex
In forex trading also applies to the basic principles of this theory. For example, the EUR/USD pair represents the price of the Euro against the US Dollar.
If EUR/USD is going down at the moment, most people will think that the USD is strengthening. In fact, prices can fall because indeed the availability (supply) of Euros is accumulating, while the demand for Euros is decreasing.
Simply put, traders who buy Euros are less, and traders who are buying US Dollars increase.
Demand and supply equilibrium
Demand and supply equilibrium is a condition when demand and supply intersect, where the point of intersection is a condition of equilibrium. You can see the illustration image above again.
In equilibrium conditions, the amount of supply equals the quantity of demand. So that in this condition the price tends to be stable. There is not much change, either up or down.
In equilibrium conditions, it illustrates that consumers and producers expect this in a balanced condition. Where the price for the buyer is not too high, and the price for the trader is not too low. The condition of equilibrium is that both of them agree on a balanced demand and supply.
How do demand and supply interact to create an equilibrium?
Equilibrium depiction using a line that crosses the demand line and the supply line.
The market in general determines the purchase price following the theory of demand and supply. In a condition when a supplier reduces its production, while demand is stable, if the price was low previously, it will increase the price because the number of goods in the market will decrease.
In a condition where the production from a supplier is equal to the amount of demand in the market, the supply and demand lines will cross where the point of intersection shows that consumers and suppliers are at the same level.
Demand and supply equilibrium in forex
In forex, equilibrium is depicted in conditions where the market tends to move flat. It is seen when candlestick patterns appear lined up in a narrow price range.
If you draw the top and bottom lines of the price, it resembles a rectangular box, with an upper and lower border with a low height.
In fact, in forex, there are rare conditions that become equilibrium requirements. So that some traders describe equilibrium as a representation of support and resistance.
The description is as follows:
- The turning point when supply exceeds demand can become a resistance zone. When the price moves up touching the resistance zone, the next price will go down.
- The turning point when demand exceeds supply can become a support zone. If the price declines and enters the support area, it is likely that the price will rise again soon.
What are demand and supply factors?
Factors that affect demand and supply in economics, among others, are caused by other factors that are considered constant or ceteris paribus.
Several factors that influence demand include the following:
The price of the goods itself
If the price of goods low, possible to cause increasing demand.
Related goods price
If a substitute good is available for one item and the price falls, then the demand for that good decreases.
And if the demand for complementary goods increases, the demand for these goods also increases. Complementary items, such as coffee with sugar.
If the demand for coffee increases, the demand for sugar will also increase. As a result, the price may increase if demand increases while supply is stable.
If there is an increase in employee salaries, it is possible for them to make more purchases which increase the demand for goods.
Meanwhile, what causes the supply factor to increase is:
The price of the item itself
If the price is high, the company can increase its supply of these goods. For related goods whose prices are high. It can trigger companies to increase their supply of these goods by reducing the supply of other related goods which low prices.
High production costs can cause companies to reduce supply and raise prices for goods. Conversely, if production costs are low, the firm can make more supply and prices may be lowered.
Companies that use high technology can supply goods faster than the traditional way, this can increase the supply of goods.
Government policies related to taxes or subsidies.
If the government raises taxes, it can cause companies to reduce supply, reducing the tax burden.
However, if the government provides subsidies, it can encourage companies to increase supply.
Demand and supply factors in forex
In forex, the factors that affect supply and demand in relation to the demand for currency are influenced by various factors. This is because the forex market is global, players in the forex market have various interests.
In forex it is known as technical analysis, although it is not the only factor that causes the ups and downs of supply and demand, it allows this to increase demand.
So for example there are thousands of traders who use the same indicator, the same settings, so if a signal appears from this indicator it can cause thousands of traders to open the same position.
Even though there may be a slight difference in the price of the open position, the sell or buy option will be in accordance with the indicator’s signal.
In forex, also known as fundamental analysis, this is related to economic conditions in that country.
Fundamental factors are like changes in interest rates by the central bank. NFP news, FOMC news, etc. They can increase the demand for the currency or vice versa decrease the demand for the currency.
External factors can also be the cause of increasing or decreasing demand for the currency.
For example, an international company in the field of export and import. When exports increase, this will increase the demand for the currency. If the company deals in a large number, it may cause changes in currency prices.
Are demand and supply important?
In an economy supply and demand is important, because it will determine the price and supply.
Prices and supply are expected to be in equilibrium conditions. Meaning that the demand price is in accordance with what is desired. And the supply can meet the amount of demand.
A simple example is if one family every day needs 5 servings of bread for $ 10 each, and the supplier is always able to make 5 pieces of bread. This means that there is no excess supply, and no shortage of supply, and the buyer agrees to the $ 10 price tag.
Therefore, some companies conduct customer satisfaction surveys, this also aims to analyze consumer behavior. By knowing consumer behavior, the company can predict the amount of supply in the future.
How important supply and demand in forex?
In forex supply and demand is important, because when the price of the currency has actually fallen, the government needs special efforts to increase the value of the currency.
This is closely related to the country’s economy. For exporting countries such as Japan, the value of a currency that is too strong can cause a decline in exports to foreign countries.
The reason is that a high currency causes the price of goods to be higher, so they will look for alternatives that are cheaper. This is to reduce purchase costs.
To maintain export stability, the Japanese government can take steps to reduce the value of the currency. One of them is by lowering interest rates, or by intervening in the currency.
How to trade demand and supply
There are various strategies to trade with supply and demand, some traders prefer to use supply and demand indicators. Some others use price action as the basis for their analysis.
However, the most important thing is to find an equilibrium condition, where this condition is the key to the supply and demand strategy.
Through this equilibrium reference, the trader then pays attention to a possible breakout or reversal. The supply and demand equilibrium is like a bus stop, which is safer to enter the market. Instead of taking a position when the price has gone with the trend. You may be dragged.
Supply and demand price action forex trading
A trading strategy using supply and demand emphasizes how to find supply and demand zones that will be a reference in trading by combining it with candlestick patterns which are both bullish and bearish signals.
Find supply and demand zones by identifying when prices move in a sideways range. Then draw a box line from the top price to the bottom price.
Patterns like Pinbar and engulfing become forms of reversal that often provide accuracy in trading.
How to identify supply and demand forex?
Identifying supply and demand areas is an important part of this strategy, the following steps are how to manually find supply and demand areas.
- Open any chart you can use the daily time frame or at least use the H1 time frame.
- Look at the left side of the chart, and find out if there is an area where a row of candlesticks closest. The tidier the rows are like people lined up, the better. This shows the relative equilibrium so that it can be seen that the price movement is in a limited range.
- Put a horizontal line between the ranges, we should just use a body candlestick.
- Observe if there is a candlestick cross area that is getting longer or the height of the body is getting better. It means that the volume is getting bigger.
How to draw supply and demand forex
The steps needed in drawing supply and demand in price action are to use a horizontal line or use a rectangle.
- The first is to identify market conditions that indicate equilibrium, conditions where between supply and demand equal marked by neatly lined candlesticks.
- Depending on the style you apply, for short-term trading using the M15 timeframe, while for long-term trading the Daily timeframe.
- Next, you draw a supply and demand line using a trendline or horizontal line or you can also draw a rectangle in the top range and bottom range of the candlestick.
Breakout based price action demand and supply zone
You certainly already understand breakout trading, this entry when a support or resistance level is broken by price.
The theory is that support and resistance are psychological levels of the market. If these levels are successful there is a breakdown, it is likely that the price will form a new price trend.
Take advantage of the top supply and bottom demand lines as an equilibrium area, if the price gets out of this zone it is likely to form a new price trend.
But you need to pay attention when the price breaks out. Wait for the candlestick pattern because the weakness of this strategy is a false breakout.
Patterns such as an engulfing candle, or pin bar, often provide good signals when a breakout occurs.
Pullback trading supply and demand strategy
After the breakout, prices often do not move in one direction in the trend. As with the Elliot wave theory, prices often retrace before continuing their main trend.
At the pullback entry, the trader waits for the price to bounce back closer to the supply and demand area, which is the psychological level of the market.
A safer entry is to wait for a reversal pattern. You can also use a Fibonacci retracement as a trading aid in determining a pullback as an entry.
Focus entry on price action demand and supply zone
As a simple analogy, wait for the bus at the stop and enter when the bus has stopped, don’t jump while the bus is driving.
Supply and demand strategies require a focus on conditions where prices are sideways or in an equilibrium phase. Maybe you find that the width of supply and demand is different from one another.
After identifying the supply and demand zone, focus on that area, as the entry point zone.
By applying measurable risk management, because after all the forex market is not a mathematical science, the answer is always the same in the same calculation.
How to open a new position will depend on your belief after the equilibrium zone ends. Maybe you are more inclined to breakout trading. Or prefer to wait for a pullback, at the retracement level to open a new position.
Stop loss and target profit
A trader does not just open an order, but he still has to think in determining the profit target and risk limits that are ready to be borne in an order position.
For targets in forex, calculating a moving average, average daily range, or ATR indicator can be used as a way to determine rational targets.
Stop-loss is a risk limit as a preventive measure when the entry point doesn’t go as expected. Based on the supply and demand boxes, determine the stop loss at the top range when open selling and at the bottom range when opening buy.
The advantage of a price action demand and supply strategy is its simplicity. Traders only focus on the supply and demand zone as an entry reference, as a trend stop.
But there is no perfect strategy because the forex market is dynamic and unpredictable, included Price action demand, and supply.