Many beginners in the field of forex trading get overwhelmed with the amount of information and knowledge they have to gather and learn for forex trading. It is true that forex skills are sometimes very confusing and seem like too much work. However, that happens when you do not have a strong basic understanding of forex concepts. For that reason, we are going to tell you the importance of supply and demand in forex trading: an extremely important concept to get a grasp on before starting forex trading.
Understanding Supply and Demand
Many of you must already know how supply and demand in any market directly affect the prices of the assets traded in that market. The forex market works the same way, high demand will cause the prices to rise and high supply will cause the prices to fall. A supply situation occurs when the currency pair is overbought and reaches a point where there are no buyers left to buy. On the other hand, a demand situation occurs when the currency pair is oversold and there are no sellers left in the market to sell that currency.
How Supply and Demand Works
When supply is high, the prices will start to fall as everyone will try to sell the currency when it reaches a higher price point. When demand is high, the prices will start to rise as everyone will try to buy the currency at the lowest price possible. In order to trade with supply and demand, you will need to locate the supply and demand zone.
When the prices of a currency continuously touch a high point then that is your supply zone, where the prices are high so you can open a sell position to earn maximum profits. For the demand zone, you need to find the lowest prices that a currency pair is reaching, it means that you can open a buy position as you can profit from buying at a low price.
A supply or demand zone can be set in advance after studying the charts and with the help of other factors as well you can set a supply zone or a demand zone for your trades.
Importance of Supply and Demand
This is a highly useful strategy that can guide you to make better and smarter decisions while placing your trades. It gives you an idea about when to plan your opening trades or when to close your positions. While following this strategy you will always be buying at lower prices and selling at higher prices, which in turn increases your equity.
Identifying supply and demand zone can also help you in placing your limit, stop-loss, and take-profit orders as well. Not only that, setting a supply and demand zone can also indicate to you about reversal, a sudden breakthrough, or changes in prices that can help you take maximum benefit of the situation.