For those of you who have been studying the Forex market, you may have noticed a pattern in the analysis of support and resistance patterns.
If I am on a support/resistance line and I see the market break down of the line, my instinct is to be concerned, because it means the market has rejected the support or resistance. However, this is not always the case.
Supply and demand, on the other hand, are an interesting phenomenon that you can use to your advantage. Supply and demand are both tools that you can use to your advantage in the Forex market.
But they can also be used to your advantage in your business, investments, and more. So in this post today I will discuss the difference between supply and demand and support and resistance. I will also discuss the following subjects-
- What is a support and resistance?
- What is supply and demand?
- Supply and Demand as a tool
- Use these tools in your trading
- How to use Supply and Demand in the Forex market
My Thoughts…
I’ve been thinking a lot about the difference between supply and demand and support and resistance. On the surface, they’re similar, but they’re not the same.
The difference between supply and demand and support and resistance becomes clear when you think about how one affects the other. Supply affects demand, and the other way around. Demand affects supply, and the other way around.
Supply and demand are both expressions of the same thing: human behaviour. And human behaviour is influenced by both supply and demand.
On the other hand… support and resistance is similarly influenced by human behaviour, even more so with retail traders as they watch support and resistance levels within a heard. This gives the Banks “smart money” their opportunity to manipulate the markets.
So in my opinion a supply and demand methodology will give you an edge in the markets, if you agree after reading this post then you need to check out the Forex masterclass course that will FAST TRACK your success clicking here.
What is a support and resistance?
There are two things you must understand before we begin: A support and resistance pattern is a pattern in which the price of a currency is above its support or resistance.
If a currency has a lot of supply, then it will usually be above its support or resistance. This can often create trading opportunities and make things more interesting for you. If a currency has a lot of demand, then it will usually be below its support or resistance.
This can create trading opportunities and make things less interesting for you. How is the above explained? In most cases, if a currency has a lot of supply, it will usually be above its resistance. This is because, when a currency is under pressure, you can sell more of it and try to break it.
When you see a support/resistance line on the chart, it means that you should be monitoring the market to see if the line breaks down. If you see a support/resistance line break down, the market is considered overbought.
When the line breaks down, you should buy the pair on weakness. If you see the line break up, you should sell the pair on strength.
One of the main benefits of using support and resistance is that you can predict the break down of a line by looking at the resistance or support level and interpreting the relationship between that and price on the chart.
To learn more of the differences between support and resistance and how to successfully trade them check out this post I wrote clicking here.
What is supply and demand?
First, I will start with a brief explanation of supply and demand. Supply and demand are basically measures of how much a certain type of asset has sold or bought.
There are a few different types of indicators that are used to determine how much a certain type of asset has sold or bought. These different indicators can help you to find patterns in the market, and learn how to predict price movement.
Supply and demand are the two major components of the Forex market, and the names can be confusing, so let me explain it with an example.
You have a large factory. It produces the same product every single day. It makes it every single day, even during a hurricane. The only problem with the factory is the amount of raw material it needs, which is the logs the factory uses to make the logs it produces.
The factory’s raw material input is log wood. Log wood is in short supply, and its price is high. Logs cost a lot of money to buy and are hard to sell.
Supply and demand tell us how much money the factory needs to make to stay in operation. In the above example, the situation is similar to what we are seeing in the Forex market today.
To learn more on what supply and demand is and how to make money with using supply and demand in the markets check out this latest article I wrote here.
Supply and Demand as a tool
Supply and demand are simple and straightforward.
When demand is high, the price of an asset (like gold) will go up. When supply is low, the price of an asset (like gold) will go down. Supply and demand are two factors that determine whether an asset is worth buying or not.
This brings us to a next point. When Supply is High, then Buy the asset to Create the Demand A perfect example of this is the stock market. When the stock market is high, the demand for an investment to buy is high.
This is because people are looking to get into the market at the current price and they want to make the most out of the profits when they sell at a profit. The opposite is true when supply is low. When supply is low, demand for the asset to buy is low.
In the Forex market, the supply and demand for currency is a mysterious concept. One may think that supply is the amount of currency currently in circulation, but this is not necessarily true.
The supply of currency is inversely proportional to the demand. If the demand for a currency is high, then the supply will be low, and vice versa.
In a healthy market, the supply and demand would match. But as the market moves from being in equilibrium to disequilibrium, the supply and demand begin to deviate from the equilibrium level.
Use these tools in your trading
Remember the phases of the moon when you were a kid?
You remember that each phase of the moon was associated with a different colour, which signified something about what the phase was all about.
You may remember that when the sun and moon are in alignment, it causes an “all-night festival”. This “pagan festival” was associated with abundance and fertility. When the moon is full, it was associated with sowing and growing; when it is new, it is associated with new beginnings.
When the moon is red, it was associated with death and decay.
The same concept can be used with supply and demand. The phases of the moon are associated with the supply of and demand for gold, silver, and oil. Each time the moon phases change, a different colour is associated with it.
So use these tools in your trading to your advantage and you will be able to manipulate the market. If a certain product is of high demand in a certain region, you can buy an amount of it that will satisfy the demand, or sell an amount of it that will satisfy the high demand.
The two tools that you can use are supply and demand, and when used correctly, you will be able to manipulate the market for yourself.
Understanding the fundamentals behind supply and demand in the Forex market is a huge advantage that you can use to your advantage. When you understand supply and demand, and how they relate to price movement, it is easier to manipulate the Forex market and make a profit.
How to use Supply and Demand in the Forex market
Supply and demand are tools that you can use to your advantage when making decisions when you are trading Forex. Sometimes, the markets do break down on a support/resistance line because there is too much supply, and there is not enough demand.
Other times, the markets will break down on a support/resistance line because the market is weak or oversold, and there is not enough demand. In either case, the fundamentals of the market will dictate the strength or weakness of the support or resistance line.
Below are videos of how to identify supply and demand zones in Forex and how to easily draw supply and demand zones in Forex.
Supply and demand are a very useful tool for you to utilise in your Forex strategy because they are a very quick and easy tool to incorporate into your strategy.
Further, since there is a finite amount of supply and demand in the Forex market, supply and demand can help you predict when it will break, and when the market is close to a top. This can be useful to spot other trends and trading patterns.
Conclusion
Supply and demand, just like any other tool in the market, are useful to you when you use them properly. Always keep in mind that when you are using supply and demand, you must always be willing to sell at the right time and buy at the right time.
This allows you to take advantage of opportunities when they arise and make the best of them. As a trader, the better you understand these tools, the more effective your trading will be.
