The most important skills in my opinion are those which help you make money, with successfully identifying and how to determine trends using supply and demand.
You have to be able to predict trends in order to do this. Trends are the driving forces of the markets. I’m going to show you how I use supply and demand curves to determine trends. And how to determine trends using supply and demand trading, with a simple way to determine the trend!
This article is a step-by-step guide on how to determine trends in the markets using supply and demand.
Step #1 The Basics: Why Trends Are Important
Trends are the driving force of the markets. They’re the common ups and downs of any financial asset, and usually precede an uptrend or an downtrend, or even just a reversal.
One of the most well-known examples of a trend is the trend in gold prices from 2001 to 2011. I will explain how I determined the uptrend, and the reversal later in this article.
Gold and silver stocks followed a similar trend from 1996 to 2011. When the price of gold rose, so did the price of silver and gold mining stocks. When the price of silver fell, so did the price of gold mining stocks.
And, if you combine all of these price movements, you can begin to see the general trend that gold and silver mining stocks took.
You see… the importance of trends in your trading, is what will allow you to identify what is a good or bad time to be in that given asset. Later in this article I will discuss in more depth how the use of supply and demand trading will help you to identify these trends and valid setups.
For now though lets discuss what supply and demand is and how it is going to assist you in developing as a professional trader.
Step #2 The Basics: What Is Supply And Demand?
Supply and demand is a tool used in market forecasting. You use them to determine supply and demand curves. These curves represent an amount of demand versus supply, which determines the price of an asset.
Supply and demand curves are often used by commodity traders, and I’ve used them before to predict the prices of items such as the gold market… and other Forex currencies.
In this article, I’m going to use supply and demand curves to help you understand the trends in the Forex markets. With understanding trends using Supply And Demand (A Step-By-Step Guide)
Supply and demand curves are used to determine changes in the price of an asset.
They are an example of market models. An “X” on a graph would indicate that there was a 10% change in the supply of an asset, while a “-10” would show the demand for an asset was lower.
As a Forex trader you will be able to use supply and demand, to show you which is in control, therefore giving you a much better idea where as a trader you would be needing to search for a trade setup.
Step #3 The Basics: What Is The Trend?
Let’s start with the very basics of the supply and demand curve, and what the trend is in a general sense. The chart below shows what the trend is on the GBPUSD currency pair.
The trend is the price movement of the ETF (exchange-traded fund) which is correlated to the price movement of the underlying asset. By seeing the price of an ETF rise and fall in relation to the price of the underlying asset, you can see how the price of the ETF should increase or decrease in relation to the price of the underlying asset.
A Simple Example To test this, let’s say I want to invest £10 in the GBP currency ETF and £10 in the USD currency ETF. I sell the £10 GBP currency ETF. Then I buy the £10 USD currency ETF.
The trend is what will show you the direction in which supply or demand is in control. When you have this information to hand, with understanding what is the trend. You now have a higher probability of reading the correct direction of the markets.
Being able to look at a price chart, with reading the trend quickly will also shorten the timespan of chart analysis. This brings me to a simple way to determine the trend.
Step #4 A Simple Way To Determine The Trend
First, you must determine the direction of the trend.
And this is done by testing the market in some simple ways. For example, if you don’t know the direction of the trend, this can be determined by first testing for overbought/oversold conditions with the use of trading indicators.
As these can indicate whether the trend is “bad” or “good.”
If you are unable to test for oversold conditions, then you will need to be able to do this on a shorter time scale. If the indicator is overbought or oversold on a shorter time scale, then the direction of the trend must be guessed.
Which is why I recommend that you use the simple supply and demand zones to determine the trend.
A simple way to determine the trend is with using indicators such as the EMA or Bollinger bands. In fact to learn more on this concept I suggest watching this video on supply and demand trading with mechanical indicators.
So let’s find out how to determine the direction of a trend using supply and demand.
Step #5 How To Determine Trends Using Supply And Demand
With the understanding that the number of traders in the market will always equal the number of markets, we can think of the supply and demand curve as a line.
We can think of the area between the two points as an area of increasing or decreasing supply.
Think of it like this.
If you have only one trader in the market and everyone else is trading at 50% of their capacity, then one trader will be able to move 50% more shares than anyone else.
If everyone’s trading at a 90% capacity, then one trader can trade 90% more shares than anyone else. The area between the two points is the “capacity” of the market. One thing to note is that the area in between the two lines is just the most that one trader can move.
Now I have got the theory behind using supply and demand to determine trends out of the way. Lets discuss how this will help you as a Forex trader.
Using supply and demand to determine trends in the Forex market, will simply be using supply and demand zones. You will need to first have a good understanding of how to identify and draw supply and demand zones.
This you can learn now by clicking here on how to identify supply and demand level zones. The ultimate guide!
Gone through that guide?
Great… now lets carry on!
Once you have determined that areas of supply or demand are being created and respected in their given trend direction. With an opposing zone being removed as the trend continues.
This gives you the start of the trend, and all you then would need to do is continue to draw and look to trade from these new supply and demand level zones.
To greatly improve your win rate, you can also add into this equation the use of fresh or tested zones of supply and demand. That again… was something you would have learnt in the ultimate guide you just went through above.
To create a better learning experience for you in this article today. I’ve created a video tutorial to explain the use of how to determine trends with supply and demand level zones.
Step #6 How To Use Line Charts With Supply And Demand To Determine The Trend
Another simple way to determine the trend with supply and demand, is combining the use of line charts. In this step I will discuss how you can greatly improve your probability in trading with using line charts, to find those better zones of supply and demand.
In this video tutorial below I will demonstrate how to use a line chart to determine whether there is a trend in a given market.
For example, lets say the Fed has signalled it will begin tapering its bond buying, and the market has been correcting. This would show the Fed raised rates, and when the Fed reversed course and began the taper. The Fed is cutting back on its bond buying, indicating a potential tightening of the money supply.
Once the Fed begins tapering, the lines on a line chart will show the reversal, indicating an increased risk of higher interest rates in the future. I don’t think interest rates will go up in the future, but they are almost certain to begin increasing.
The use of line charts will allow you to find and determine those major turning points in the markets. Which in due course will show you the major zones of supply and demand you will want to look to trade from.
Applying the line chart will give you a more simplified look on your charts, which you will see in the tutorial video below. You will be able to easily identify the highs and lows and swings points in any given market.
So it’s important you understand the line chart can give you that extra information, with a more simplified approach at the same time. Anyone new to trading in general or even supply and demand trading.
This concept of using supply and demand with the line chart, is going to give you an edge over other retail traders. And speed up your learning curve to becoming a professional trader.
I hope you enjoyed this tutorial on how to determine trends using supply and demand curves. I’ve just shown you that there are three types of determining the trend I used in this tutorial.
One way is to mark out your supply and demand zones, with reading the markets as they show you the zones of supply and demand are being respected, with apposing zones being removed.
The other option, was to use indicators to show you a trend is forming or already formed. I discussed the use of the EMA, which is a widely used indicator to show trends.
The third way was using line charts with supply and demand to determine trends. This is a great way to add an advantage to your trading. In other words give you an edge over your competitors.
Now that you’ve been shown how to use supply and demand to determine the trend, you can now start looking at using this with how to use the trend to make profits in the markets.
Following these short steps below will keep you on the right path!
Step 1: Get to Know Supply And Demand
The first thing you’re going to need to do is start using supply and demand curves in order to predict the trend. This is going to be the most important and common tool in your toolbox.
To learn more on the basics of supply and demand trading I suggest signing up to this free mini course clicking here.
Step 2: Apply Supply and Demand With Line Charts
Adding a confluence into your trading with the use of line charts, will allow you to find those major turning points in the markets.
Of course if you are looking to learn more ways on how to determine trends I suggest checking out the beginners trend trading course clicking here.