Trading Strategy Explained: Demand and Supply

by madhav joshi digital markting expert

The fundamental determinants of every price are supply and demand. Everything from the local farmers' market to a rare, one-of-a-kind jewel to the foreign exchange market falls under this category. As a result, traders who understand demand and supply dynamics are better able to predict current and future price fluctuations in the currency market.

A currency pair will frequently reach a point of resistance known as a selling zone, where sellers believe significant selling potential is at an overbought price. The opposite is true for currency pairs that decline to relatively low levels, a demand zone where buyers value considerable purchasing value.

What are supply and demand zones?

On a forex chart, supply and demand zones are visible locations where price has approached numerous times in the past. These mimic zones more closely than specific lines, as opposed to support and resistance lines.

On the price chart, supply and demand imbalances in Forex can be viewed visually. Moreover, each tick on the graph shows a shift in the traders' perception of the underlying pair. As a result, if traders have a certain bias for a currency pair at a certain level, the informed trader can spot it on the Forex chart.

Traders can create their own charts to pinpoint demand and supply zones.

Tips demand and supply trading

1) To determine supply and demand zones, use larger time frames.

Traders can better understand regions where price has previously bounced off by zooming out. When switching between several time frames, make sure to utilize the relevant charts. To represent this zone, draw a rectangular shape. Demand and supply zones do not always have to be present at the same time; in fact, currency pairs might often reveal one or the other.

2) Look for big swings away from the prospective demand and supply zone.

Traders that are bullish or bearish can find value at certain price levels. When institutional traders and large banks recognize the value, they will seek to profit from it. As a result, price movement tends to pick up speed until the value has lessened or been fully realized. When you see numerous instances of this at the same price level, it's more likely that it's a value zone and hence a supply or demand zone.

3) Indicators can be used to confirm support and demand zones.

Traders can use pivot points daily or weekly to detect and validate supply and demand zones. We have a page dedicated to all major markets that shows relevant support and resistance levels. In addition, traders can search for support and resistance levels that coincide with demand and supply zones for higher-probability trades.

Traders can also use Fibonacci levels to better predict possible turning points in supply and demand zones. The interaction of individual supply and demand concepts creates supply and demand zones.

Supply and demand trading strategies

Range trading strategy

One can use supply and demand zones for range trading, but they must be well established. Traders can utilize a stochastic indicator, such as the RSI to help detect overbought and oversold positions.

Because this is a non-directional trend trade, both long and short entries can be identified. Traders can magnify their trades into a smaller time frame to discover an attractive entry after seeing oversold/overbought situations on a longer-term chart.

Breakout strategy

Another supply and demand trading technique is the breakout strategy. Price cannot stay inside a specified range indefinitely and will eventually fluctuate in one direction or another. Therefore, traders are looking for a good entry point into the market in the breakout direction since this may be the beginning of a big trend.

Timeframes and Supply and Demand Trading

The significant benefit is that Supply and Demand zones can be applied at all times with equal success. The excellent advice is to use them for periods longer than 60 minutes. Anything lower than that contains a lot of noise and false signals.

The 4H and Daily periods, in my experience, are the best for spotting supply and demand zones.

Bottom Line

Every forex trader's development requires an understanding of why a currency pair moves. At its most fundamental level, the price fluctuates due to supply and demand imbalances in the market. Once you've grasped this concept, you'll be able to look at trading through an analytical lens.

The supply and demand notion is a fundamental concept in economics. According to the Supply and Demand rule, if a commodity's supply is ample and demand is low, the excess is created, driving the price down. The rule is simple to comprehend and may be applied to anything within the tradable resources category.