The Ultimate Guide to Master Supply and Demand in Forex (P1)

• You’ve found the definitive resource for understanding and exploiting the relationship between supply and demand in foreign exchange trading.
• Forex traders’ love affair with the supply-and-demand model shows no signs of slowing down. As a bonus, it’s among the most lucrative Forex trading systems.
• Everybody knows that the Foreign Exchange Market (Forex) is a massive market where dealers buy and sell currencies. When supply is high, and demand is low, prices fall; conversely, prices rise when supply is low and demand is strong.
• When you fully comprehend the interplay between these two factors, you can predict almost any price change on any given price chart.
• Learn all you need to know about supply and demand in foreign exchange with the help of this comprehensive guide. You’ll get a crash course in the fundamentals of trading, including how to spot and capitalize on market imbalances with the skill of a seasoned veteran.
• Also covered is the use of odd enhancers to filter supply and demand zones. Using this filtering approach, you may eliminate the unlikely areas and concentrate on the more promising ones.
• If you follow the advice in this article, you should be able to put this trading approach into practice effectively and start making money in the markets. Almost all you need to know to understand supply and demand is included in this book.

Let’s get down to business without further ado.

Introduction to Supply and Demand

What are Supply and Demand?

• According to the law of supply and demand, a commodity’s price will fall when supply is abundant, but buyers are scarce.
• If there is strong demand for a product but a limited supply, the price will rise to reflect the scarcity.
• When the supply of a particular currency pair is strong, but demand is low on the foreign exchange market, the price of that pair will fall. Conversely, a currency pair’s price will rise if there is a supply shortage while there is strong demand.
• For instance, investors may often hedge their bets by purchasing haven currencies like the Japanese yen or the Swiss franc during periods of uncertainty and anxiety, causing them to minimize their exposure to the stock markets. Therefore, the increased desire from investors to purchase the Japanese yen will lead to a rise in the yen’s value.
• Another case in point is when the Federal Reserve (Fed) raises interest rates. Because of the higher interest rate, the US dollar will become more appealing to investors. The practice of buying a currency with a high-interest rate and selling one with a low-interest rate is known as the carry trade.
• The economic principle of supply and demand applies to all tradable goods and services.
• Supply and demand zones need to be defined, and knowledge of price chart dynamics must be gained before the main plan can be implemented.

Supply Zones

Supply zones are areas above the current price with significant demand from buyers. When supplies are plentiful and demand is low, prices fall as unsold goods are bought to meet demand.

Demand Zones

The term “Demand Zone” refers to a price range below the current price where there is substantial interest in purchasing. There are more buyers than sellers at this point, causing prices to rise as the market tries to meet everyone’s needs.

Understand Market Balance-Imbalance in Forex

Patterns of equilibrium and disequilibrium repeat themselves in the foreign exchange market. Therefore, until the market trades above the high excess (breakout above the resistance level) or below the low excess (breakout below the support level), it will continue to trade inside the established excesses (breakout below the support level).

Balance Area

In the above graph, a balanced market would have an equal number of buyers and sellers. The distribution of the price action is up and down within a range (sideways).

Imbalance Area

When either buyers or sellers are in the driver’s seat, the market becomes unbalanced and shifts in their favor. If sellers have the upper hand, prices fall, whereas if buyers are in charge, prices rise.

Let’s look at the graph to see how we might use the ideas of equilibrium and disequilibrium.

The blue arrows in the following graph represent stable regions. Both buyers and sellers feel at ease in these price ranges. Thus, transactions take place in both directions simultaneously. Take note of the price’s horizontal movement.

• When the market shifts from equilibrium to disequilibrium, price action often shows giant candles breaking away from the region. What this indicates is that there is a discrepancy between the two players’ abilities. Prices fell like a rock down a cliff as the number of sellers outnumbered the number of purchasers, as seen on the left side of the graph.
• When this happens, the market is in a state of equilibrium, waiting for the price to make a decisive move to the upside or the downside. In other words, the price went risen, the market was stable, etc.
• The price plunged quickly and then proceeded to fall with little candles, as shown on the right side of the chart. This indicates that market players are looking for a reasonable price to achieve balanced rotations.
• We might think of this as the market’s typical rhythm: equilibrium, disequilibrium, equilibrium, disequilibrium, etc.
• Finding these equilibrium points is a primary goal of the supply and demand strategy. We want to place our orders in these zones to profit from the imbalance above and the resulting directional price movement.

How to Identify Supply and Demand Zones

First, we locate the current price, then scan to the left in search of a significant, sudden change in either direction.

So, here’s what you do:

• Identify Current Price

• When you get to the very final drop or rally, look to the left to discover ERC.

The next step is to locate an ERC candle. A massive candle with a short or nonexistent wick is known as an “Extended Range Candle,” or ERC. To illustrate the appearance of an ERC candle,

• Origin of the Move

After seeing a decline or a surge in price represented by ERC-type candles, we must investigate their cause.

From this, we may build up either a supply or demand area. Here’s a case in point:

• In this case, we begin at the current price and scan to the left for a price decline or increase accompanied by at least one of the ERC candlestick patterns. Once an ERC is located, the source of the decline may be pinpointed. We refer to this point in time as “base” since that is where everything began.
• We need the foundation to map out the zone.
• Having learned where supply and demand zones are, the next step is to practice drawing them.

The Different Structures of Supply and Demand Zones

We need to learn two different kinds of patterns: reversal patterns and continuation patterns.

A reversal pattern will appear on the chart when the trend changes direction. For example, two of our buildings are:

• The structure of a down-trending price movement looks like a dip in price, followed by a base structure, and then a recovery in price to the upside.
• The price action in this structure looks like a rally followed by a base and then a significant collapse to the downside.

Price tends to adhere to these reversal patterns because they are robust.

Patterns of continuation:

Here are some examples of these pricing schemes:

As the price falls, a support level is formed, and the price declines again.

The price begins to rise, develops a base, and then begins another rally.

These patterns of behavior are evident in the direction of the trend. However, trading in these areas is risky since prices often challenge and break through these structures.

That’s why we ignore continuation patterns and instead look for reversal patterns, which have a far better chance of paying off.

How to Draw Supply and Demand Zones

How to Draw Supply Zones

Looking up and left from the current price for powerful bearish candles with massive bodies can help you accurately identify a supply zone. See the price gap relative to the baseline in the following chart. Price formed a great base structure with three candles, starting from the left of the chart and moving up in a solid uptrend before pausing for a while. Long bearish candles formed as prices continued to fall, indicating an extreme supply/demand imbalance in the area. Precisely, this pattern consists of a rally followed by a base decline.

• We might take advantage of the price’s repeated regression back to the supply zone by establishing our trades there. First, however, please note how the price drops and retraces its gains whenever it gets close to the supply zone without breaking through the proximal line. In other words, vast stacks of unfulfilled orders are kept in and around this supply hub.
• Right now, we need to determine whether the foundation is sound. Choosing the optimal supply zone to draw your lines from relies heavily on the layout of your base. As a general rule of thumb, a base with fewer than six candles is a good trading foundation.

Two horizontal lines complete the zone (distal and proximal lines). In the absence of the tails, the proximal line is close to the current price at the base of the basing body. Beyond the tails and the base candles is the distal line.

How to Draw Demand Zones

A price rise or cluster of bullish candles and a base with fewer than six candles help us pinpoint a demand area. The example chart below shows how the price plummeted, halted to build a consolidation structure (1 base candle), and then rose up from the base with extremely long bullish candles, establishing a demand zone.

Let’s go through an example now that we know where to put both lines.

There is just one candle available at the supply base. Therefore, the distal line is drawn at the highest wick of the base to depict the supply zone accurately. The low point of the base’s body is where the proximal line is positioned, as seen in the above graph.

As the price dropped, three candles formed at the foot of the demand zone. Putting the far line at the base’s smallest wick is a must for accurately depicting the demand zone. The highest part of the base candles is where the proximal line should be placed.

The stop loss will be too significant if you use the high and low of the wicks.

Your chances of completing your order at the going market price will decrease if you include just the highest wicks for the supply zone and the lowest wicks for the demand zone.

A trader’s risk tolerance and profit potential are critical considerations when mapping out supply and demand zones.