The concept of supply and demand is always at the center of every forex market condition; be it
- A trending market
- Support and resistance
- Notable price turning point
From what has been observed in the recent past few years, the supply and demand trading method has become popular among traders and has continued to grow. The whole idea of the supply and demand points of strong price movement in the market and mark them as supply and demand levels or zones. The advance point is for the demand, while the decline point is the supply level.
From the way the forex market works, about 90% of supply and demand trades are carried out with the mindset that large institutions place pending orders at these levels, waiting to be executed when the market returns, but this is entirely wrong. Even pending orders cannot cause the market price to be altered in any way that market orders can.
HOW TO APPLY THE CONCEPT OF SUPPLY AND DEMAND IN TRADING FOREX
There are three different ways supply and demand levels can be applied beneficially in trading the forex market. They are
- Reversal trading
- Support and resistance
- Stop-loss and take profit
With a little bit of creativity, traders can, on their own, find out more ways to use this concept to trade the forex market.
This is one of the best uses of forex and demand levels/zones in trading. A lot of pro traders specialize in this method amidst many others. The idea here is to identify a strong previous market turn, mark it, and wait for price to come back to that area. The odds of seeing a successful reversal will be extremely high if there is a false break out. You can even step things up a bit to create a higher probability trade by combining the fake breakouts with momentum divergence and a fake spike using the Bollinger bands.
SUPPORT AND RESISTANCE:
Basically, the supply and demand zones are a two way thing, just like support and resistance. This is why it is really beneficial to combine the two; that is support and resistance with supply and demand. This will help traders to understand price movement in a more definite way; giving him or her edge in the market and a better opportunity at winning trades.
STOP-LOSS AND TAKE PROFITS:
Supply and demand zone is a good option when it comes to profit placement. With a profit target placed ahead of a zone, it gives one a better chance at managing risks, especially giving back all of the profits when the open interest in that zone is filled.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.