Forex Supply and Demand Zones

Guide for Forex Trader Trading Using Supply and Demand Zones

In this article, we will consider important concepts not only in trading but throughout the economy – supply and demand. You will always find detailed answers to questions such as: What is supply and demand, how to calculate supply and demand for currencies, how supply and demand work in the real world, how to trade using supply and demand, what are supply and demand zones? I will also share my opinion on this issue and offer you a fairly simple trading strategy.

Supply and demand in the economy

There is no point in talking about how to use supply and demand in trade if you do not understand the essence of these concepts. Most educated people are familiar with these concepts from university classes at the rate of economics. Now the fundamentals of economics are taught even in schools, and I taught this course for high school in some educational institutions. Before we begin to deal with the market adaptation of these laws, let’s look at these concepts from the perspective of the primary source, namely, from the perspective of the classical laws of economics.

Demand is a request of an actual or potential buyer, consumer to purchase goods at the means available to him, which are intended for this purchase. Demand reflects, on the one hand, the buyer’s need for certain goods or services, the desire to purchase these goods or services in a certain amount, and, on the other hand, the ability to pay for the purchase at a price that is within an acceptable range.

Offer – the opportunity and desire of the seller to offer their products for sale on the market at certain prices. In quantitative terms, the proposal is characterized by its size and volume. The volume, the value of the offer is the amount of the product (product, service) that the seller wants, can and is able, in accordance with the availability or productive capabilities, to offer for sale on the market for a certain period of time at a certain price.

As can be seen from the current definitions, in essence, supply and demand is a characteristic of opportunities between buyers and sellers at a certain point in time.

Based on these definitions, two, perhaps, the basic laws of economics were deduced – the law of demand and the law of supply. I will not describe these laws in full, I will only try to convey the essence. The essence of the law of supply is that the higher the price of a product, the higher the supply of that product. The law of demand says the opposite – the lower the price of a product, the greater the desire of the buyer to buy this product. These laws are familiar to us in everyday life. If you are a buyer in a store, you want to buy goods of the quality you need at the lowest possible price, and if you are a seller, it is your interest to sell your goods at the highest possible price. Also, in economics, there is such a thing as satisfaction with supply and demand. This means that supply and demand cannot grow forever. Sooner or later, the moment will come.

To understand these concepts from the point of view of Forex trading, from these laws and concepts we need to make the following:

  1. Demand is the desire to buy;
  2. An offer is a desire to sell;
  3. And supply and demand may increase and decrease;
  4. The main factor affecting supply and demand is time;
  5. Both supply and demand are volume values.

Supply and demand on the exchange

Demand on the exchange is a condition when a buyer wants to buy the necessary amount of goods at an affordable price at a particular point in time.

An offer on the exchange is a condition where the seller wants to sell the necessary volume of goods at an affordable price at a particular point in time.

As can be seen from these definitions, they are almost identical to the basic economic ones, but with a specific emphasis on exchange factors, such as the volume of goods and time.

When can a large number of bidders on the exchange have a general desire to sell? I think everyone knows the answer to this question – when the price of goods reached peak values. A desire to buy from a large number of participants arises when the price of a product is very low. This is the main law of the exchange, which was formed at the dawn of the economy – sell when it’s expensive, but when it’s cheap.

But how to determine when it’s expensive and when it’s cheap? Indeed, on the exchange, time is so compressed that it is almost impossible to understand the state of the price at a particular moment in time. Maybe! And the answer is hidden in the question itself – time. Supply and demand, or rather, the desire to sell and buy, always have a clear reference to time. Demand may exceed supply at a particular minute, and in a minute everything can change. It follows that if you want to define supply and demand zones on a price chart, you must learn to tie them to a point in time.

Supply and demand areas

Let’s now define concepts such as zones, or supply areas and demand areas. In fact, these are areas in which market participants can form maximum demand or maximum supply.

The chart above shows a possible supply zone. If you describe the characteristics of this zone, it will become clear why it is located there.

The supply zone is an area on the price chart, upon reaching which, the desire of sellers begins to far exceed the desire of buyers. Desire can be described as volume, and therefore, in this zone, sales volumes will exceed purchases – an imbalance of supply and demand is created. If this proportion at a particular moment in time is correct, then, in this case, the price will stop growing and begin to decline. Traders call this situation a reversal. Perhaps the greatest desire of any trader is the desire to learn how to correctly determine the place of price reversal. Returning to our chart, we see that in this zone the price really reverses due to a strong imbalance, and this has already happened 5 times.

In the following graph, I depicted the demand zone. The demand zone is an area on the price chart, upon reaching which, the desire of buyers begins to far exceed the desire of sellers, or the volume of purchases becomes higher than sales. If this proportion at a particular point in time is correct, the price will stop falling and growth will begin. This is also a reversal, but already in a falling market. The search for supply and demand zones is what every trader should be able to do.

How supply and demand zones work

Now let’s talk about the zones themselves. The first question that most people have is this: why the zone, and not a specific point or level? To answer this question, it is necessary to turn to the theory of the formation of positions on the exchange. So, the price on the exchange is moving due to the fact that participants at various times sell and buy, and therefore invest money (volumes) in their expectations. Suppose, I believe that the price of 100 is acceptable for me, and I want to buy goods at a given price. I send an order to the exchange with my desire to buy at 100. And someone believes that the price of 100 is a good opportunity to sell. At the moment when the price approaches this quotation, my application for purchase is realized, and at the same time, the seller’s application is being realized. In the future, the price will move in that direction, the volumes of which are higher. If I bought five lots of goods for 100, and the seller sold only 4 lots at 100, this will lead to a price increase since the purchase volume is higher than the sales volume. But, if this all ended, we would see a U-turn at a specific point and movement to the point of the next U-turn. In reality, everything is different. Why? Because, besides the two of us, there are many other participants in the market who either committed or will perform similar actions. Thus, the price begins to fluctuate up and down, and the actual turning point occurs only after some time. In other words, everyone sees that at the moment it is better to buy or sell, but each has its own reasonable price. It is for this reason that the moment of reversal is not a specific price level, but a price range. And the higher the time interval, the higher the range. as the purchase volume is higher than the sales volume. But, if this all ended, we would see a U-turn at a specific point and movement to the point of the next U-turn. In reality, everything is different. Why? Because, besides the two of us, there are many other participants in the market who either committed or will perform similar actions. Thus, the price begins to fluctuate up and down, and the actual turning point occurs only after some time. In other words, everyone sees that at the moment it is better to buy or sell, but each has its own reasonable price. It is for this reason that the moment of reversal is not a specific price level, but a price range. And the higher the time interval, the higher the range. as the purchase volume is higher than the sales volume. But, if this all ended, we would see a U-turn at a specific point and movement to the point of the next U-turn. In reality, everything is different. Why? Because, besides the two of us, there are many other participants in the market who either committed or will perform similar actions. Thus, the price begins to fluctuate up and down, and the actual turning point occurs only after some time. In other words, everyone sees that at the moment it is better to buy or sell, but each has its own reasonable price. It is for this reason that the moment of reversal is not a specific price level, but a price range. And the higher the time interval, the higher the range. In reality, everything is different. Why? Because, besides the two of us, there are many other participants in the market who either committed or will perform similar actions. Thus, the price begins to fluctuate up and down, and the actual turning point occurs only after some time. In other words, everyone sees that at the moment it is better to buy or sell, but each has its own reasonable price. It is for this reason that the moment of reversal is not a specific price level, but a price range. And the higher the time interval, the higher the range. In reality, everything is different. Why? Because, besides the two of us, there are many other participants in the market who either committed or will perform similar actions. Thus, the price begins to fluctuate up and down, and the actual turning point occurs only after some time. In other words, everyone sees that at the moment it is better to buy or sell, but each has its own reasonable price. It is for this reason that the moment of reversal is not a specific price level, but a price range. And the higher the time interval, the higher the range. that at the moment it’s better to buy or sell, but each has its own reasonable price. It is for this reason that the moment of reversal is not a specific price level, but a price range. And the higher the time interval, the higher the range. that at the moment it’s better to buy or sell, but each has its own reasonable price. It is for this reason that the moment of reversal is not a specific price level, but a price range. And the higher the time interval, the higher the range.

Forex Beginners

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