How Are Price Movements In Forex Formed?
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How Are Price Movements In Forex Formed?

The dynamic between supply and demand is at the core of every trade, and the same is true for the stock market and forex. The push and pull between the two also reflects the price of a security, its availability, and the desire to own such a security. In the foreign exchange market, technical analysis is used to examine or forecast price movements. An important aspect of the analysis is determining supply and demand (S&D) zones.

Markets are governed by the laws of supply and demand in the same way that the law of gravity governs our planet. Prices go up and down due to an imbalance of supply and demand. If supply is higher than demand, prices fall. Meanwhile, if demand is higher than supply, prices will rise.

The Importance of Supply And Demand Zones: Things To Consider

The supply and demand zones are responsible for moving the market. The trading supply and demand zone helps traders make buying or selling decisions. When the price falls beyond a certain level and there is an indication of a sideways movement and then starts to move in reverse for a certain period of time, this means the market is in a state of decline. accumulates and can go up. The distribution zone is the point where the price decline begins and starts moving downwards. To simplify accumulation – a bull market indicates high demand and is seeing accumulation. Similarly, a bearish market indicates greater supply than demand and indicates a distribution. Distribution indicates selling pressure while accumulation indicates buying pressure.

Supply and demand are seen as support and resistance

Before discussing further, you should know the following points:

The supply-demand area leads to the creation of support and resistance (S&R). Support and resistance levels are widely used by traders to make decisions. Resistance is the price level on the chart at which the rise in the price of an asset reaches a break. Support is the level on the chart when a downtrend breaks. Supply and demand zones are spread over a wider area than support and resistance levels. Wider coverage ensures that you can more reliably assess future price movement than a single level or deep line S&R case.

An understanding of S&R as well as supply and demand can help in analyzing price charts.

Any talk about supply and demand trading always involves searching for supply and demand zones using candlestick charts. Seeing the large candles forming successively on the chart and building a base will help you draw the S&D zone.

The market is dominated by large investors such as central banks, hedge funds, market makers, and other financial institutions. These investors are also influenced by several factors that influence their trading decisions such as daily news affecting the world economy, economic data about several countries.

When they make trading decisions, they move prices in the forex market strongly and create imbalances in supply and demand. The bigger the imbalance, the bigger the price movement.

How many times have you seen the market retrace to a level where a major move recently started, only to honor that level almost exactly before making another strong directional move? It happens often in the market. Take a look at the examples below to understand more fully:

As you can see in the chart above, the big red candle represents a big bank sell order, this selling decision is influenced by big economic news.

When the bank takes this sell order and drops the market, the bank cannot liquidate all the quantities, thus leaving some quantities to sell from the same zone. The quantities remaining in the zone depend on the buyer. If the bank finds a lot of buyers to sell, the bank can liquidate all the quantities and nothing is left in the zone. But in most cases, the bank leaves the amount as a limited order in the same zone where they sell.

The start of a big move becomes a very attractive price to sell, as there are some limit orders left at that price, banks and other financial institutions will sell from the same zone when the market pulls back to test this zone. Because they know that there are other financial institutions that will sell from the same zone, and this is the easiest way to make money without conflict. See other examples to understand better:

In the chart above, you can see a large blue candle representing a bank buy order. This large buy order is influenced by economic news. Don’t bother trying to analyze economic news and how they will affect the market. You are not a bank trader, you are just a retail trader with a small trading account. All you have to do is identify attractive prices from which banks and financial institutions will buy or sell.

As you can see, the bank created the first purchase order, and due to lack of buyers, the bank was not able to liquidate all the quantities, thus creating another limit order.

Banks and other financial institutions will see this zone as an attractive price to buy because they already know that a bank is buying from it and they still have a limit order on it. See what happens when the market pulls back to test this zone.

As you can see when the market is pulled back into this zone, it is rejected as there is some quantity left as limited orders in this zone, and other financial institutions will buy from the same zone as it is considered a very attractive area to buy from.

When the market rises from this zone, other retail or retail traders will join in, and if you know how banks and financial institutions trade the market, you will join the movement and make money following the big participants in the market.

This is how the supply and demand strategy works, in the next lesson you will learn everything you need to master this strategy and start using it in your trading.