Demand and supply forex trading

It will go up to the stage that an orange to purchase will be available with any customer who is able to pay a higher price. That level is the equilibrium level under these market conditions. Identifying supply and demand zones is the basis for the trade-in supply and demand which is very important for beginner Trader. As markets experience dramatic rises and falls, orders usually issued by large institutional investors are not filled.

They leave pending orders at the base of the liquidity zones to buy or sell, with the hope that the market will return to fill the remaining orders. The demand zone is a high price increase zone and the supply zone is the one where the economy has made a sharp decline. If you are a beginner trader and to become a good professional forex trader. The Forex Scalper teaches you the best scalping trading strategy using supply and demand zones which is already traded and tested by thousands of TFS members and performs daily trades. They provide very tight raw spread account with fast execution and having multiples deposit and withdrawal options.

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Looking for a Trusted Regulated Broker? Join IC Market. Please follow and like us:. And this is where liquidity comes in. In order to understand why supply and demand zones can work as the basis of a trading strategy, we need to look at how buyers and sellers behave around these zones. A lot of this comes down to finding liquidity. When there is a lot of liquidity, we say that the orders can easily be absorbed by the markets.

It means that there are many traders willing to take the other side of your order. When there is little liquidity, it might be harder to get your orders filled. Because there might not be enough traders to take the other side of your trade at the price you want, you might get filled at a worse price than expected.

The risk you assume is called market liquidity risk. Another common symptom of illiquid markets is that they have a bigger spread. It also makes sense that the bigger your orders are, the more liquidity might be an issue. This is why some institutional traders use special techniques to get a good price for their order. Whenever institutional traders need to open a position, they do so with much larger size than the average retail trader. In fact, their positions are usually so big that if they were to simply enter at once, they would move the market considerably.

So what do they do? Many of them will employ something called order slicing, where they split up their single order into multiple parts and only execute those in the market once enough liquidity is available. The second aspect is that institutional traders understand where liquidity is accumulating.

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As you might remember, we can see liquidity as orders on the opposite side of your trade. So where can they find that? The institutional trader is looking for enough liquidity to get a fill on his big order. He wants to go long but so he needs to find traders who want to sell their position to him. Additionally, there will also be traders who go short , again adding liquidity to the market. This is why you will often first see a spike in the opposite direction at the origin of a strong price move.

The Liquidity Spike is the pattern that gets created when large market participants need liquidity and move the market in order to get it. Using the previous chapter on liquidity, we understand what is creating both the consolidations and the momentum drives that creates supply and demand zones. But why is the price bouncing from our zones when returning to those same zones? If there was an institutional trader either a bank or hedge fund or anything else who made the price move so strongly that it created a supply or demand zone, what really happened is that the liquidity around that price dried up.

So what happens when the price returns to the level they were initially taking a position? In turn, this moves the market again, which is what drives the supply and demand bounce. So guess where they are looking to take profits?

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Exactly, the same supply and demand levels that we are looking at! Imagine for a second the following demand zone. We could see the price briefly dipping lower and then shooting up. Then on the return, we could see the price bouncing strongly back up again:. That was a 1H chart. Now look at the same instrument on the 8H charts.

Imagine that at this demand zone, someone took a short on the 8H. Immediately, the price turns the wrong way and the trader is at a loss. What happens is that whenever the price comes back to the entry, it gives the trader an opportunity to get out of what he thinks is a bad trade, for a break-even result. That was close! Of course, when all these traders are covering shorts, it means that a lot of buy orders are flooding the market, again pushing the price back up.

I often read that the reason that supply and demand zones show a reaction on the retest is because of pending orders of institutional players. The question you need to ask is: why would they want to do this instead of just using market orders? There is zero benefit in doing so and limit orders give the institutional traders at least two disadvantages:.

Whenever a trader creates a pending order, this shows up in the order book. In most cases, those add liquidity to the market. Imagine that you have a really big order. Any institutional trader will first need to observe the order book to see what size he could put on around these zones.

Using pending orders would simply pose a risk that the market moves away too much. With this technique, you wait for price action confirmation. This confirmation can come in many ways but the general idea is that you want to see in some way that the supply or demand zone is acting as a barrier and blocks the price from going through it. Even though this can be done in a mechanical way, choosing stops and targets is probably the most subjective topic of trading supply and demand. Part of the reason for this is that it also depends on who you are as a trader: do you like to have a high win-rate strategy with a low reward to risk ratio, or do you prefer a low win-rate strategy with a high reward to risk ratio?

This is a question that only you can answer, based on how many losses you can stomach. Needless to say is that a strategy that goes for 10R profits what is R? An indicator such as ATR can give you an insight into how volatile an instrument is and as such, can help you with determining how wide your stop loss should be. For example, we could choose to use a stop loss that is twice the period ATR of the entry candle:.

The first step in trading supply and demand is understanding what it is, how it works and what drives price action around these zones. While only introductory, the aim of this article was to shed some light on this and I hope you found it helpful. Supply and demand is easily so extensive that a book could be written about the topic.

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The next step for you should be to go out and look at charts. Identify the supply and demand areas and see how the price behaves around these areas. Observe, make notes and build your experience. If you want me to write more about supply and demand and how to trade it, please leave me a comment on this article. I'm a full-time, independent forex trader. I've been trading for over 10 years and specialize in price action trading, reversal trading, trading psychology and algorithmic trading. If you're determined to become a pro trader, I offer a select pro trading program. When I'm not trading, I'll either be travelling the world or rock climbing likely both.

Read my story here. Please consider carefully if such trading is appropriate for you. Past performance is not indicative of future results. Articles and content on this website are for entertainment purposes only and do not constitute investment recommendations or advice. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. By far, one of the most common questions I get these days is how to trade supply and demand. What Is Supply And Demand? Felix I'm a full-time, independent forex trader.

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