Forex Trading
Most of the traders prefer to trade using technical indicators like RSI and MACD. Others love to use a simple chart to make their decisions. Without a doubt, support and resistance lines are a vital part of a trader's routine.
We want to expand your trading potential and therefore we present to you a guide to supply and demand zones in Forex trading. With the manual, you will learn how to identify and use the zones in your favor.
Meaning of Supply and Demand Trading
The concept of supply and demand comes from economic theory. Supply is the amount of goods available to users, while demand is the need for the goods. The more supply we have in the market, the easier it will be for the price of an asset to drop. Conversely, high demand often drives up prices due to customers' need to purchase an item.
In trading, people use supply and demand as resistance and support areas where the price of an asset can decline or reverse. They are similar to resistance and support lines at first glance. However, there are fundamental reasons for supply and demand zones to occur.
Bid and ask trading is about placing your orders according to the zones where the price tends to reverse due to various factors. Along with other trading techniques, Bid and Ask trading provides a comprehensive and powerful tool that can take your results to a new level.
Supply and Demand Zones
A supply zone is where traders and investors try to sell an asset for fundamental and technical reasons. Some market participants are selling because the asset has reached its target. Others do the same because of changes in the economic environment or news that has altered an asset's outlook. Usually, the price reacts sharply to the offer zone, which means that there is a lot of interest in selling.
https://preview.redd.it/c9u5avt35rr91.png?width=1200&format=png&auto=webp&s=254a3618679e37de238874bf66543bd89a8abbce The same goes for demand zones. A demand zone is a price area with strong buying interest below the current price action. Many investors do not want to buy an asset until it falls and reaches the demand zone because higher returns can be obtained on the portfolio. Looking at the chart below, we can see a lot of buying interest in the demand zone, most likely caused by a large volume of buy orders sitting at this level.
https://preview.redd.it/k35yyu155rr91.png?width=1200&format=png&auto=webp&s=f204c366b18eb1e4165626937bc2038930491a21 The most important thing to know is that the supply and demand zones are an area of interest for many traders. In addition, we will discuss the stages of trading with supply and demand zones. You will find that it is complete and easy to access.
Related: Top Stock Investment Newsletters How to Trade in Supply and Demand Zones
To plan your trades correctly, you need to set an entry point and Stop Loss and Take Profit orders . At first, you should check the charts and find an asset that looks something like this:
https://preview.redd.it/zropkxi65rr91.png?width=1200&format=png&auto=webp&s=7db15473809466142da37dca15440fa4a5433601 Next, we need to establish the demand zone for the asset. Define the upper and lower borders of the demand zone by placing the support lines at the bottom of the chart. As a result, we will obtain the demand zone of the asset.
https://preview.redd.it/4eeq2fz85rr91.png?width=1200&format=png&auto=webp&s=e90c366c1c36e61054455fa85d47f4eeff545b6d Next, we need to define an entry point for the operation. We'll talk more about various trading strategies later in this guide, but for now, let's say we're trading the most common bid and ask trading strategy , which is range trading. Therefore, we will look for long entries somewhere in the demand zone. For the asset above (GBP/USD), the entry must be between 1.1408 and 1.2000.
It is crucial for supply and demand trading to understand that when the asset goes down, the chances of it reversing are higher because more investors and traders find the instrument valuable and oversold.
Supply and demand Trading Strategies
Range Trading Strategy The most typical bid and ask trading strategy is range trading. The rules are simple: find an asset with a strong supply or demand zone and enter the bounce. Recent movements in the EUUSD pair can serve as an example.
https://preview.redd.it/l4slwasa5rr91.png?width=1200&format=png&auto=webp&s=1dc42d005cd19012845a9a79cacebb832c989ad8 Every zone that causes an upward movement is a demand zone, and vice versa. The pair has been moving from the supply zone to the ask zone. Thus, the trading strategy is based on waiting for the price to enter the zone and opening orders in the opposite direction.
The rules are quite similar to support and resistance trading, but the supply and demand zones are usually wider. In the case of the image above, it would have been smart to go short near the 1.0790 area and go long below the 1.0660 line. Keep in mind that if the price breaks through the bid zone, it can quickly become a bid.
Breakout Strategy As always, supply and demand zones are not forever. At some point, the sentiment changes, the market starts to price in new data, and the alignment of forces changes from bullish to bearish and vice versa. Therefore, you must know how to use the breakout strategy when trading supply and demand zones. Here's an example:
https://preview.redd.it/ingw4mcc5rr91.png?width=1200&format=png&auto=webp&s=63f90a27dc1543621370ba9c5943f45132d9dca9 In the chart above, the yen touched the demand zone four times. After the sentiment changed, the demand zone lost its power and became a supply zone. That is why the USD/JPY pair dipped below the area and retested before further decline. Watch for the increase in volatility after the breakout. This can help us spot the difference between a true breakout and a false breakout.
The breakout strategy is a logical continuation of range trading due to the unavoidable nature of markets moving from one consolidation to another. Therefore, the more touches of a supply or demand zone you observe, the greater the chances of a breakout. As we mentioned before, pay attention to volatile movements because they mean that the revaluation process has begun.
Use of Supply and Demand Zones as Risk Management
Supply and demand zones are very similar to support and resistance; therefore, these areas indicate where the trader can place Stop and Limit orders.
These areas allow traders to implement a favorable risk-to-reward approach to trading. Range traders who sell into the bid zone can set stops above the bid zone and targets in the ask zone. Conservative traders can set the target above the demand zone or implement other risk management techniques .
Tips for Using Supply and Demand in Forex Trading
- Use Long-Term Timeframes to Identify Supply and Demand Zones
Supply and demand trading is generally about identifying the zones where the reaction is unusually strong. You can trade on smaller timeframes, but noisy and somewhat chaotic moves are very likely. Large players such as institutional traders, banks and investors use longer timeframes to eliminate unnecessary volatility. Therefore, it would be better for you to do the same and opt for less risky trades. Play big!
- Identifies Strong Movements Outside the Potential Supply and Demand Zone
It continuously monitors the market sentiment and tries to predict the possible reaction when the price enters a supply or demand zone. A sharp, volatile move in the direction of the zone usually indicates a potential breakout. Thus, the asset could continue its movement in the same direction.
- Use Indicators to Confirm Supply and Demand Zones
Indicators like RSI and MACD are extremely helpful in identifying supply and demand zones. They can provide you with information about a possible continuation or reversal. If the price moves in the supply zone and the RSI oscillator is not in the overbought zone, then there is a high probability that the asset will continue to rise. Conversely, high numbers on the RSI chart along with a price reaching the supply area indicates a possible reversal.
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