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For the first timer who joins to the forex business, we often read about supply, demand, support and resistance. For those who have studied economics, the terms supply and demand are often interpreted as balance of power from both sides. Supply is the amount of goods and services produced and then trying to be sold to the public, while demand is the number of goods or services needed by a community.
In forex terms, what is meant by supply and demand is not goods or services like we buy daily necessities, or companies that sell their products. Supply and demand in forex terms is a price point where buyers, who take long positions and sellers who take short positions are “hostile” to each other and make prices go up or down. Now, before going on about forex supply and demand, let’s first check what are the long and short positions.
Long position is a method of purchasing an equity with the aim of profit if the price goes up. Conversely, short position is a method of purchasing equity with the aim of profit if the price goes down. The large number of investors and brokers participating in long or short, will determine the direction of the price of a currency.
Back again with supply and demand, trading techniques using this are widely discussed, but many also feel incompatible with this trading strategy. The main reason is because the value of support and resistance that changes every day, making it difficult for novice traders to determine the starting point of entry. Others find it difficult, because they are not familiar with the change from sell to buy or vice versa when an area of supply or demand is passed.
Before entering the supply and demand trading system, we first know the introduction, which is support and resistance. Literally, the meaning of support and resistance are an obstacle / barrier. In forex, support is the point where the lowest price of a currency pair can reach and resistance is the highest point of a currency can reach. Support and resistance are the forerunners of trading systems and trading techniques in supply and demand. Therefore, let us first discuss this resistance trading technique.
In general, trading techniques using support and resistance are quite simple and easy. We just need to know the point and there are only two possibilities: the price reverses or continues strengthening / weakening.
Trading techniques with support and resistance are quite often used, both by world analysts and forex retail traders. The basic idea of trading techniques is to see the extent to which the market responds to a price point, both psychologically, fundamentally and technically. This price point is then a reference for tradets to enter or exit (both with SL or TP).
While determining resistance and support points there are various methods, namely:
- Fibonacci, the technique of determining support and resistance points using fibonacci is to draw Fibonacci indicators on a chart from one extreme point to another extreme point. An example is the following picture:
The use of Fibonacci Retracement is the most frequently used, where point 0 starts from the beginning of the trend and point 100 is the maximum of a trend. In the example above, it appears that the pair GBP / USD is in a bullish condition in the previous position, so the 0 point is taken from below.
The 0 point starts from the price level around 1.2430, 23.6 at 1.2650, 38.2 at 1.2800, 50.0 at 1.2940, 61.8 at 1.3050 and 100 at the trend’s highest point at 1.3380, respectively. Fibonacci lines are the support or resistance points for this GBP / USD pair. So, it can be concluded that the next support points of this pair are at 1.2800, 1.2650 and 1.2430. While the resistance points for this pair are 1.3050 and 1.3380.
2. Pivot Point, is a method of determining support and resistance points with the help of calculating the average daily movement, then determined support and resistance points by calculating the average swing movement of some time before. The formula for calculating pivot points is:
Pivot points (PP) = (High + Low + Close) / 3
Then we will calculate the support and resistance levels of pivot points using the formula:
- First support and resistance levels:
First resistance (R1) = (2 x PP) – Low
First Support (S1) = (2 x PP) – High
- Second support and resistance levels:
Second resistance = PP + (High – Low)
Second support = PP – (High – Low)
- Third support and resistance levels:
Third resistance = High + 2 (PP – Low)
Third Support = Low – 2 (High – PP)
Looks complicated, but actually trader doesn’t need to bother. From search engines, there are many that offer free pivot point tools and can be installed directly on MT4 or MT5.
3. Candlesticks, seeing the potential of support and resistance can also be done with candlesticks in our charts. This method is simple, but it takes a little ” flight hours” to see it. The most common thing is seen if candlesticks unable to penetrate a point, so as if the candlestick gathered to try to break the point. See the following picture:
In the picture, the yellow lines appear as points that have been tested by candlesticks and fail. These price points will then become the next support or resistance, which then becomes the determinant in the price movement of this pair. The more candlesticks gather at a price point, the stronger these support and resistance levels.
Apart from using the three methods above, there are also those who identify support and resistance points with candlestick pattern. By looking at candlestick patterns, support or resistance points can be determined, especially candlesticks that show reversals such as doji, engulfing or pinbar. This method is similar to the use of candlesticks in number 3, but in more detail with attention to the pattern.
There is also a combination of several ways above, for example number 1 and number 2 or number 1 and number 3 to see the area of support and resistance more clearly. The meeting between the two ways earlier can be said to be a strong support / resistance point, while what does not meet is said to be a weak support and resistance point.
Some advantages of trading using support and resistance, including:
- Determination of entry and exit is easier, because the support and resistance points will be the entry and exit points. Entry at the support point will be followed by the target point at the resistance point, and vice versa for entry at the resistance point followed by the target at the support point.
- The use of fewer indicators on the chart, making it easier for observation and analysis. Many indicators sometimes cover charts and candlesticks in them, making it difficult for us to analyze and see predictions that will occur. By using support and resistance points, only one or two indicators are needed to analyze a pair.
Deficiencies in trading techniques with support and resistance, including:
- It takes time and practice to practice eye foresight, especially those that only rely on candlesticks. The solution is to use the Fibonacci method or install the pivot point indicator.
- Traders still do not understand that there is a possibility that prices will continue to go down or up, when support or resistance levels are broken. Counter-trend trading can succeed if a pair has moved within a maximum of 1 day, or the support / resistance point is a strong point. If not, then there is a possibility that the price will continue.
Well, this technique is one of the trading techniques that bridges fundamental trading and technical trading. Why? Because traders who rely on fundamentals generally use data from the news to determine their position, whereas traders who rely on technical techniques generally use technical analysis. The use of resistance support becomes a “middle ground” to analyze both, because what happens in the market is reflected in the chart. While this trading technique focuses on the chart display and the dynamics that occur in the chart we see.
Keep in mind that a support or resistance point, can be tested only once or even many times, depending on market forces, especially the strength of buyers and sellers. Resultants of both types of traders who will push prices past the support / resistance, or even turn around to the initial level. If it has only been tested once, then it is stated that the support or resistance is weak. If it has been tested more than 2 times, it is classified as medium, and which has been tested many times over 5 times, it can be said that the point of support or resistance is a strong point.
After understanding and exploring this trading technique, we can then proceed to the next discussion, namely supply and demand.
Then, what about the supply and demand trading system? We will discuss in the next article.