Supply and demand is a fundamental part of the Beginners Forex strategy. To begin I will explain to you exactly what I mean by supply and demand in Forex.
Supply is where we have sellers in the market. Whereas demand is where we have buyers in the market. The first step in measuring how strong or weak an area of supply or demand is to count the number of pips the market has moved.
Pips are what we use to measure the change in price in Forex. The more pips the market moves the stronger the buyers or sellers are. For 1 pip to be moved in Forex it can take as much as 100 million dollars.
Here are examples of strong areas of supply and demand in the market that have moved a large number of pips. (By clicking on the images they will become enlarged)
Now what makes these areas of supply and demand strong areas? There are 2 variables we use to analyse an area of supply or demand. The first is to count the number of pips that were moved by the area of supply or demand (sellers or buyers).
In the examples above the areas of supply and demand move the market a different number of pips. The area of supply moves the market 580 pips. Whereas the area of demand moves the market 850 pips. Making the second area of demand the stronger of the two areas.
Pretty simple I hope. Ok, lets move on to the second way we analyse supply and demand.
The second variable to analyse, are the areas of supply or demand that the market has moved past. What do I mean by areas that have been moved past? Let me show you with these examples.
Above are examples where areas of supply and demand have different levels of strength. Notice how the area of supply on the left cannot push the market beyond the original area of demand. The area of demand is where the buyers had originally pushed the market upwards.
As the sellers are unable to move past this area of demand we now can identify this as a weaker area of supply. Whereas if it had been able to move past the area of demand we would consider it a stronger area of supply.
In the next image on the right we have an example where the area of supply is able to push beyond the area of demand. In this example the sellers (area of supply) are able to move past the original area of demand. The sellers push the market 200 pips beyond where the buyers started pushing the market upwards making this a stronger area of supply.
In the image below we have a strong area of supply that moves past an area of demand. This time the area of supply moves past the area of demand with more strength.
Now we have two areas of supply that were able to move past areas of demand. So how do we know which area of supply is the stronger?
Very simply the 630 pips moved by the area of supply in the final example makes it a stronger area of selling pressure than the 200 pips moved by the previous example of supply.
As you know pushing the market 1 pip requires a huge amount of money. So by simply applying this logic we know that an area of supply that was able to push the market more pips makes it a stronger area.
Understanding supply and demand is an essential part of my Beginners Forex strategy. So remember to always apply these two steps when analyzing this fundamental aspect of Forex.
- Count how many pips have been moved by the area of supply or demand.
- Analyse the areas that were passed by either the sellers or the buyers. (Supply or demand)
Once you understand how to identify stronger vs weaker areas of the market you will be able to assess the Forex market with logical factual analysis.
You would be surprised by how many traders struggle with the basic concepts I have outlined in this post. Once you are able to understand supply and demand you will be able to move on the next level of my Beginners Forex strategy.