Without supply or demand, the price will not be able to move on the chart, and it will always remain in a straight line. Supply-demand creates an imbalance in the market that results in price fluctuations. As with most forex trading strategies supply and demand traders incorporate the concept of trend into their quantitative trading systems analysis of the market. The problem is the theory above is completely wrong with the way the forex market actually works. 90% of supply and demand traders all trade supply and demand zones with the idea that large institutions place pending orders at these zones ready for when the market returns, this is wrong !

The supply and demand concept states that if the supply of a commodity is high and the demand is low, this generates excess which drives the price down. We use the big bearish yellow trend line to measure the intensity of the downwards move. Then we hold the trade until the price action breaks the yellow bearish trend line. The last red arrow shows the moment when price breaks thru the trend line to the upside, which would be a valid signal that the trade needs to be closed.

Sometimes, levels of support and resistance are very clear on the charts and remain intact for a long time. As you notice, there are different ways to visualize price action. Important for you to know is that all price actions as you see on the charts are derived from market participants buying and selling currencies. Despite the fact there are several ways to capture price action on a chart, we make use of Japanese candlesticks throughout the chapters of the Learning Center. The levels of support and resistance are detected primarily by analyzing the evolution of price action on a chart and identifying where prices halted after a rising or falling period. The market, understood as the will of millions of investors, considers a price level low enough and acceptable to purchase, so when the price reaches that value, purchases soar.

STEP 5: Mark the zone around this ‘origin’

In simple terms, supply and demand trading is the method to follow the banks and big traders. About 94% of the forex market is traded by the central banks, hedge funds, and institutions. So that’s why if you want to make a profit, you should try to predict the movement of these market makers. If you trade like a retail trader with emotions, you will lose in this market. Any really Matt, I just tend to trade AUD/USD EUR/USD USD/JPY because these are the currencies which i’m most familiar with but you can use supply and demand zones on any currency. Its the only thing that makes sense in buying and selling anything.

The candlesticks or bars that mark the origin of a strong uptrend are called the demand zone or accumulation zone. The candlesticks or bars that mark the origin of a strong downtrend are called the supply zone or distribution zone. We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey.

Introduction to Supply and Demand

The supply and demand concept came from the economic theory. Supply means the number of goods available to users, while demand is the need for the goods. The more supply we have on the market, the easier it’s for the asset price to fall. On the contrary, high demand usually boosts prices due to customers’ urge to buy an item. Eventually the market will break in the way that these whales had been buying or selling, creating a period where supply and demand are out of balance i.e. a price trend.

Demand, on the other hand, is a situation where people are ready and willing to buy a certain product. For example, in the early days of the pandemic, governments announced lockdowns in most countries. As a result, demand for oil declined, which pushed prices lower. In economics, supply is defined a period when suppliers of an item decide to increase its quantity in the market. During the Covid-19 pandemic, OPEC and its allies decided to slash production, which helped to lift oil prices.

Changes in supply and demand create trends as these market participants fight for the best price. The only reason why a price moves in any, and all markets, is because of the imbalance in supply and demand. Price Action Breakdown is a book about pure price action analysis of financial markets.

We saw this in the 2021 petrol crisis in the UK, when supply chain issues caused panic buying, resulted in little to no petrol available and people had to restrict car usage. First, we’re going to go back to economics 101 and look at the very basic laws of supply and demand. Then we’ll explore how this relationship plays https://currency-trading.org/ out in financial markets specifically. They tend to be weak zones to trade because most of the time price tests these structures and breaks through them. I have learned all the trading methods initially, but now I am stopped at supply and demand trading. I will also recommend you stick to supply and demand to trade.

Supply And Demand

Now, on the right side of the chart, the price dropped in rapid fashion and then continued dropping with small candles. This shows that the market participants are seeking a fair price for the balanced rotations to occur. When buyers or sellers are in control, the market is imbalanced and will move in the direction of the predominant players. If sellers are in control, the market will move down and if the buyers take control, the market will move up.

This is called the equilibrium where buyers equals sellers. Once we identify an ERC type of candles and we have either a drop or a rally in price, now we have to find the origin of that move. Hold your trade at least until the price action reaches an opposite level on the chart or use price action rules to manage the trade. In other words, motion occurs when one of the two competing forces becomes zero.

Types of Supply and Demand zones

The Rally-Range-Drop scenario describes a market top , followed by a sell-off. The market top signals a level where the sell interest got so great that it immediately absorbed all buy interest and even pushed price lower. Narrow and short accumulation zones, followed by a strong breakout, are more meaningful.

If the trader is taking trades off a lower time-frame then problems can arise as they are always going to be trading against the trend on the time-frame they take trades off. To a new trader who doesn’t really know much about supply and demand trading, the theory I’ve explained above sounds like it makes sense. Professional traders use the high liquidity provided by retail traders to short the market and move price lower. If sellers exceed buyers, we will have a downtrend movement to the downside pushing price lower on the curve. As shown on the chart, price is located at half the distance on the curve.

STEP 3: Look for big green or big red candles

Price tested the overlapping supply zones on the daily chart and moved down to test the demand zone as shown in the chart below. Now let’s discuss the main four odd enhancers that will help us filter our zones and choose only those supply and demand zones that have high probability of success. Again, when drawing supply and demand zones, you have to keep in mind both your risk exposure and your odds of making money.

How to identify supply and demand

Each time the price tested our demand zones, it triggered our buy orders. Look how the price is attracted to these zones like a magnet. Notice as the price increases from the demand zone, that it eventually reaches the nearest supply zone above. However, the price action breaks the level with high momentum cluing us in that the level is not strong, and that the GBP/USD might extend its bullish run.