How to use Demand and Supply to trade Currencies in The Forex Market

In order to make money from either the Financial Market or the Foreign Exchange Market one has to trade in this market. This “trading” happens to be the hardest part because not everyone fully understand the various ways or method on how currencies can be traded.

There are many ways on how one can trade currencies profitably in the Forex Market. Using demand and supply happens to be one of those ways, we will talk on how to use demand and supply to trade currencies in this article.

In this article, we will look at what are demand and supply and the overall effect they have on the Financial Market

Currencies are traded in pairs, for example we don’t just trade only the United State Dollars (USD) but we trade it with another currency which can be any country’s currency such as Great Britain Pound (GBP), Euro (EUR), Japanese Yen (JPY) etc.

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Most people sometimes mistaken commodities of different sort such as Gold, Silver and Oil (Brent or WTI) to be part of the Forex Market which is not right, we will only look at currencies in this article.

What Are Demand And Supply?

Demand and Supply both have different meaning depending on their usage, but I will try my best to make you understand how they can be properly used, to know when to buy a specific currency pair and when to sell.

Demand

Demand occurs when the price of a currency pair is rising that means a lot of people or market participants are buying, depending on the size of the market and it’s volatility, the buying pressure or demand can range from minutes to days or months and can even cause spikes in the candlestick movement.

Supply

Supply on the other hand happens when those who initially bought begins to sell, in this scenario the price fall, a falling price might encourage other  market participants in the market to further sell thus adding more momentum to the selling pressures

Thing to Note about Demand and Supply

There are different reasons that might cause a shift in demand and supply such as government policies, geo-politics and news from around the news and trying to follow all this is hectic and seems impossible, so that brings about the question “how do we trade using demand and supply?”

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There are different indicators and even Expert Advisors that trade using this “demand and supply principles” but there is no better way to master this technique than to train your eyes to identify them.

Another important thing to note is; there is always a demand and supply on all time frames on the chart. For example if you open a 1 minute chart and a 5 minute chart you will notice a huge difference that’s because the smaller the time frame has more noise and lots of fake signals. So, in other to get a better and accurate signal, I recommend traders to use the daily chart (time frame) and if possible to even use the weekly chart (time frame).

From the diagram above, those green arrow are the rising demand and the red arrows indicate the supply gaining momentum (NOTE: when demand keep rising, the price of any currency traded increases and when supply kicks in the price of reduces thus, we buy during a bullish market (demand) and sell during a bearish market (supply) but the ultimate aim to identify the peak in demand and supply)

 

The green circled areas are the peak point for demand and the red circled areas are the peak point for supply.

So, what we are interested in is finding these peak zones and how we do that using pending order using the USDJPY as a reference point, we can see how well this currency pair trend especially of a higher time frame like the dailies time frame.

From the laws of gravity in physics we all know that what goes up (demand) will come down (supply)

If we are expecting demand to kick off any time but we do not at which price to enter a buy trade we can use a buy limit order, what this does is to open a buy position below the currently market price, the purpose is that since we do not know how far price might range, we might as well hedge our position.

READ: What Are Exchange Rates?

The same happens for a sell position (supply), using a selling limit order we can hedge our position and expect supply to exceed demands.

Some Challenges One tend To Face when Using Demand and Supply to Trade

As I earlier stated, that using demand and supply to trade might aid you in trading but it is not a get rich quick mode of trading. When using this method to trade do not forget that you will need a good equity (trading capital) because of days of high volatility which can be caused by news and political events and thus spikes on the candle sticks on the chart.

Another major challenge is trying to know where to place your limit order. But with time and trading experience, it will become easier remember to trade currencies that trend very well such as USDJPY, EURJPY, GBPUSD etc.

In summary, without the right trading psychology, method and education it may be hard to really make money from the financial market.

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