The ultimate guide to supply and demand forex
Foreign exchange or Forex is a network of sellers and buyers transferring currency between one another at the agreed price. It’s a method by which central banks, companies, and people convert currencies from one to the other.
The Forex industry encompasses currencies from across the world. And given the parameters that contribute to pricing movements, anticipating the future exchange rates become more challenging. But like other financial markets, even Forex gets driven by forces of demand and supply. Thus, it becomes significant to get an insight into these influences that can drive price fluctuations.
Welcome to the post that helps you in mastering supply and demand in Forex trading. Once you know the dynamics of the forces (supply & demand), you can fairly predict each price movement!
Understanding supply and demand zones indicator in forex
The demand & supply concept in this industry illustrates that with a higher commodity’s supply, the demand will be low. Here, demand & supply is inversely proportional to one another. In Forex trading, when the currency pair’s supply is high, the demand becomes low that drives prices lower.
Given that these two forces are the most profitable tactics in this trading system, you need to know about the supply and demand zones indicator. With much ado, let’s consider learning about them in brief.
Outlining things about demand & supply zones
The demand zone is the price area where there’s a strong purchasing interest. In a graph, it usually stays under the current price. At the demand level, purchases exceed sellers &the price gets higher right within filled orders.
On the contrary, the Supply zone is usually where there’s a more substantial selling interest. In a graph, it usually stays above the current price. At the supply level, the sellers can exceed buyers &price moves down with more unfilled orders.
Demonstrating everything about market balance-imbalance
The Forex market trades between established excesses as long as it doesn’t trade above high excesses or below low excesses. To understand the balance and imbalance factors, let’s elaborate on the two areas individually.
- What is the balance area?
When the market stays balanced, there will be equal amounts of selling and buying. The price will keep moving up & down, following a range. And that’s what creates the distribution!
- What is the imbalance area?
When the sellers and buyers are in total control, the market stays imbalanced. And if the sellers stay in control, then the market will go down. Similarly, when the buyers take control, it moves up.
So, how to identify demand and supply zones?
To identify the supply & demand zones, let’s learn the critical parameters:
- Understanding The Current Pricing
- Finding the ERC or Extended Range Candle in the last rally or drop
- Knowing the origin of a move
Now that you have an understanding of how to identify these zones, let’s elucidate the different structures of these zones.
Elucidating the different structures of demand & supply zones
Basically, there are two types of patterns or structures to learn. While one is the reversal pattern, the other is the continuation structure. Let’s understand these two structures individually:
- Things to learn about reversal patterns:
They are the chart patterns that get formed when trends reverse up and down or vice-versa. For this pattern, there are two structures:
- Rally-base-drop is when the price gets rallied up, creating a structure by the significant drop in the overall pricing
- Drop-base-rally is when the price moves in the downtrend, creating a price drop followed by the base structure
- Things to learn about continuation patterns:
In this pattern, there are two structures:
- Rally-base-rally is when the price rallies upward, forming a base pattern and then moving up
- Drop-base-drop is when the price drops & forms the base pattern, thereby moving down
Final Verdict: The continuation patterns are inside a trend. Apparently, they are weak zones for trading as most price tests the structure’s breakthrough. That’s the reason you can choose the reversal patterns as they have good success odds compared to this pattern.
Drawing demand & supply zones: How to proceed?
Read on if you want to learn master price action trading with supply and demand. This section elaborates on the best way to identify the supply & demand zones.
- Drawing the demand zones: What to know?
Identifying the demand zone requires finding the rally in pricing. If you wish to draw this zone, all you require is placing a distal line at the highest wick of the base. Upon then, you need to place a proximal line at the base.
You may include both the low and high of wicks. But in such cases, you have an increased risk by making the stop larger than expected. If you wish to include the highest wicks for supply and lowest wicks of demand zones, it means you have decreased the odds of getting the order filled.
While drawing the demand &supply zones, consider both the risk exposure &odds of making a profit.
- Identifying the supply zones: What should you learn?
For identifying a supply zone, find the bearish solid candles having large bodies at the left from the current price. As a matter of fact, the price keeps retracing back to this supply zone. So, it means you can take complete advantage of the retracement to place the trades around a basing area.
It’s the section where you need to notice how the price will retrace up &drop right after it approaches that supply zone without piercing the proximal line. That means, the larger loads of unfilled orders get placed around the supply zone.
Now’s the time to assess whether the basing structure is valid! Preferably, you can select a base having less than sixc andles as it might be a great base structure for trading. Finally, draw the zone by using two horizontal lines (proximal and distal lines). While the proximal line is close to the current price, the distal line stays above basing candles (including tails).
Trading supply and demand zones
Buying at the demand zones and selling at the supply zones is a straightforward and easily-explained strategy. You just need to identify the fresh demand and supply zones in order to proceed with trading.
Upon then, you need to place the limit orders at a proximal line & the stop loss at a distal line. As soon as that gets over, you need to wait for a price to return to the demand or supply zone in order to trigger the orders.
Let’s explain it with the help of examples!
Example: When the price creates the rally-base-drop or drop-base rally
While trading supply and demand zones, you don’t usually have to focus too much on the drop-base-drop or rally-base-rally type of zones as they get located within a trend. The trades also fail a majority of times. So, when it’s about rally-base-drop or drop-base-rally, they are solid and reliable structures for trading.
The price creates the rally-base-rally structure. After drawing the demand zone and waiting for prices to trigger the buying order, the price came back.
At times, when you’re not sure whether the zone shall produce a successful trade, you may wait for a price to test the zone. In this manner, you may decrease the chances of losing the trade.
Example 2: When there is one supply zone & two demand zones
For the supply zone, the price rallied up and paused for some time and dropped. So, there’s an imbalance at the price level. After drawing the zone and placing the order, the price came back twice.
Simultaneously, when the price from supply dropped, it created two demand zones to retest the zone. Then, price rallied up & paused, thereby creating the rally-base-rally type. Every time its price tested the demand zones, it just triggered the buying orders.
Identifying the supply & demand curve
Now comes the time to identify the curve of institutional supply and demand Forex. So, learning about the present price is the first move when it comes to identifying the nearest demand & supply zones in total. The distance between these proximal lines of demand and supply forms a curve. Now, you need to locate the price & identify the closest demand and supply zones.
Finding the high probability zones: Odd enhancers to consider
Here’s presenting the major four odd enhancers that help you filter the zones and select only the demand and supply that have the highest success probability. It will assist in mastering price action trading with supply and demand!
- The move’s strength
Good demand & supply zones have a solid move out of zones.
- Time invested at the zone
The second odd enhancer is the price spent at the zone.
- Fresh levels
The third one is to check whether or not the zone is fresh.
- Ratio of reward-to-risk
The last odd one in this list is the reward-to-risk ratio. At least a 1:2 ratio will make the zone valid for the trades.
The fundamental concept of mastering supply and demand in Forex trading is aligning yourself with the professional players in this 21st-century Forex market. Moving the price at least half the primary point is also challenging for retail traders. That’s the reason why learning these approaches becomes crucial.