Supply and demand strategy is a popular approach in Forex trading that focuses on interpreting market movements as a result of supply and demand imbalances.
In this approach, traders use price charts and other technical indicators to identify potential zones of supply and demand where the market may change direction.
Traders who use a supply and demand strategy can employ various technical tools, such as trend lines, support and resistance levels, and Fibonacci retracement levels, to identify these zones. They can then place orders based on the projected price movement.
In this article, I will outline the 3 easy steps to help you get started in learning supply and demand strategy.
Table of Contents
- Step 1: Understand the basics of supply and demand strategy
- Step 2: Learn how to identify supply and demand zones
- Step 3: Use price action and chart analysis to confirm supply and demand levels
Step 1: Understand the basics of supply and demand strategy
To effectively use the supply and demand strategy in Forex, it is important to first understand the basics of how it works.
In the simplest terms, the supply and demand concept states that the price of an asset (in this case a currency pair) will be determined by the balance between the number of buyers and sellers in the market.
When there is more supply than demand for a currency, traders look for areas on the price chart where there is an excess of sellers over buyers. This can result in a decrease in demand and a consequent drop in prices. Conversely, in the case of demand, traders search for zones where there is an excess of buyers over sellers. This can lead to an increase in demand and an upward push in prices.
As you can see on the chart below, supply exceeds demand which drives price lower creating new supply zones (in red color).
And when demand exceeds supply, buyers step in and push price up creating new demand zones (in green color).
Step 2: Learn how to identify supply and demand zones
The key to applying the supply and demand strategy is to identify the price levels at which supply or demand is strongest. These levels are referred to as supply and demand zones.
To identify supply zones, look for areas where prices have consistently fallen from a certain level, indicating an excess of supply in the market. Conversely, to identify demand zones, look for areas where prices have consistently risen after reaching a certain level, indicating an excess of demand.
Step 3: Use price action and chart analysis to confirm supply and demand levels
To further confirm the validity of supply and demand zones, traders can use price action and chart analysis. Look for price patterns such as bullish or bearish pin bars, long wicks, and consolidation patterns that confirm the strength of supply and demand zones.
Additionally, traders can use technical indicators such as moving averages and trend lines to identify potential areas of supply or demand. By using these indicators in conjunction with price action analysis, traders can gain a more comprehensive understanding of supply and demand dynamics in the Forex market.
Make sure you read the Ultimate Guide to Master Supply and Demand in Forex.
Overall, supply and demand strategy is a powerful tool that can help traders to anticipate market movements and make profitable trades. However, like all trading strategies, it requires diligence and practice to achieve success.