Supply and demand in forex
What are supply and demand zones in forex?
Supply and demand zones represent the horizontal price accumulation area on the chart where traders hypothetically expect that price change. While lines of resistance or support are exactly determined, supply covers many resistance price levels, and demand zone covers several support price levels.
Supply zones (red color on image) are areas on the chart covering active resistance levels where traders usually place sell orders. Demand zones (blue color on image) are areas on the chart covering active support levels where traders usually place buy orders.
Supply and demand indicator MT4 download
How to find supply and demand zones in forex?
To find supply and demand zones in forex you need to draw several support and resistance lines on the chart and determine areas where price has approached many times in the past. Simple, you can download indicator that draws supply and demand zones on the chart for each time frame.
Supply and demand indicator MT4 download
Are supply and demand the same as support and resistance?
Differences between supply and demand areas and support and resistance levels are only in terminology because supply and demand areas are broader than resistance and support. While support and resistance are price levels, supply and demand zones are price areas. For example, the demand area can have several support levels; the supply area can have several resistance levels.
A Forex Trading Guide Based on Demand and Supply
A general phenomenon for determining prices is supply and demand, be it in any field. This is exactly how prices in the foreign exchange market are also determined. Therefore, to understand the rise and fall in prices and anticipate the price in the future, it is imperative to have a good understanding of demand and supply, which is the determiner. Read with us to understand how demand and supply function in trading markets, how to strategize the use of demand and supply in the market, how demand and supply zones function, and how to use supply and demand strategies to your benefit.
How do supply and demand areas work?
At times, currency pairs rise to reach the resistance area called the selling zone, where it is understood that the sellers have a good potential of selling at an inflated price. The opposite scenario can also work out when the currency pairs fall too low prices, known as the demand zone, where there is potential for the buyers to buy at a good value. Therefore, understanding the forces of demand and supply is essential in understanding the jump in prices at various levels.
Supply and demand zones can be understood as certain areas on the forex chart where price has been fixed numerous times. There are support and resistance lines; however, we can identify zones in specific lines by studying supply and demand. The traders can customize the forex charts for arriving at these supply and demand zones.
Now that you know the basics about demand and supply function in a forex market let us provide you with certain useful tips for trading in foreign exchange markets.
Consider long time frames for arriving at the demand and supply zones: At times, the supply and demand zones do not coincide in the same area because of the currency pairs revealing only one of the two. Therefore, it is important to take a look at the forex chart from a distance. You must carefully observe this area and mark it out distinctly to denote this portion.
Keep an eye for the strong moves made in the supply and demand zone: At varied price levels, there can be either a bullish or a bearish trend. Since bigger institutions such as banks and institutional traders head fast for capitalizing on this opportunity, the price range rises and drops instantly. Since many price alterations and capitalization occur at this price, it can become an important area and thus be demarcated as the supply and demand zone.
Employ other indicators to identify the supply and demand zones clearly: It is integral to have the right supply and demand zone identified, which can be done by employing other indicators alongside pivot points. Along with this, traders must look for support and resistance levels to have better probability trading. Fibonacci levels can also be employed to aim with greater accuracy on the supply and demand zones.
Let us now also look at certain strategies which will help in trading based on supply and demand.
Strategies for Using Supply and Demand While Trading
There are multiple trading strategies for demand and supply that can be employed to have the best trading experience.
- Range Trading Strategy: By identifying the supply and demand zones properly, range trading becomes another plausible option. The traders can employ other indicators such as RSI or stochastic indicators for observing the conditions of overbought and oversold. With this being a trade with no specific direction, it becomes possible to observe short and long entries. Therefore, traders have the opportunity to view the chart from a distance, considering the long-term entry points as well as for smaller time frame entries.
- Breakout Strategy: Yet another strategy that can be used considering demand and supply is the breakout strategy. We know that price can never be constrained within a range, and as time passes by, it will definitely shoot in a direction. Therefore, under this strategy, traders look for a favorable entry point in the market in tandem with the breakout to get going in a positive trend. However, while steeping in a short-term trade, the traders must be cautious and must, in all cases, anticipate a possibility of retracement to the demand zone.
- Supply and demand zones as parameters of risk management: Since the supply and demand zones function like support and resistance, they are good indicators of stopping and limiting. Therefore, it becomes possible for the traders to play safe, thereby maintaining a positive ratio of risk and rewards in all cases. For range traders who plan to sell at the supply zone, it is best to stop above the supply zone and the targets near the demand zone. Further, for conservative traders, it is best to place the target above the demand zone. Along with this, numerous other risk management techniques can be used to experience safe trading.
Therefore, supply and demand trading can be beneficial for numerous reasons. Once you master the basic concepts of supply and demand and how they impact the foreign exchange market, having a positive risk and reward ratio will become extremely easy for you.