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Supply, Demand, Support & Resistance (Part 2)

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After we have previously discussed the support and resistance in this article, the next discussion is about supply and demand in forex. Supply is the number of investors or market participants who offer currencies at a certain price level and expect the price of that currency to fall. While demand is investors or market participants who bid currencies at a certain price level, and hope the price will rise. This term is also known as long and short.

Supply and demand in forex, usually addressed to the currency pair which is called for the first of the notation. For example EUR / USD,  the supply of EUR / USD means the market sells the EUR portion in the market and increases the purchase of USD so that it hopes that EUR / USD falls. Conversely, if the EUR / USD demanded by the market, market will buy the EUR portion in the market and sells the USD portion so that the EUR / USD price rises. The same applies to other currencies, for example USD / JPY, USD / CAD, and so on.

What is added or subtracted in the forex market? Of course the answer is futures contracts from investors, speculators and institutions that are “scrambling” to buy or sell currencies or existing currency pairs. These contracts affect the price movement of a currency pair. The number and size of these contracts varies and the data can be seen in Commitments of Traders, which are usually released weekly via Commodity Futures Trading Commission or CFTC.

We skip the discussion about the contract and will be discussed in other occasion. Then, how to find out the supply or demand area? How to look for it is similar to determining the points of support and resistance, only the result is an area. For more details, we can see the following chart image:

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Preview of Supply and Demand Area

From the picture, shade of green and red areas are represent the area of ​​demand and supply. For simplicity, we can download the “Shved Supply Demand” indicator which can be downloaded freely or by typing in a search engine with the keywords above. This shading will automatically be visible after the indicator is mounted. The information read in the picture is Untested Sup, Verified Soup and Verified Res.

The meaning of each terms above are:

1.Untested Support, meaning that the demand area / support has never been tested and only formed after the previous low. The possibility of prices reversing or not is still unknown.

2. Untested Resistance, meaning that the supply area / resistance has not been tested and only formed after the previous high. The possibility of prices reversing or not is still unknown.

3. Verified Support, meaning that the demand area / support has been tested more than 2 times and survived. Most likely the price reverses up if it touches this area. If this area is successfully crossed, the price can continue to decline to the next demand / support area.

4. Verified Resistance, meaning that the supply area / resistance has been tested more than 2 times and survives. Most likely the price will turn back down if it touches this area. If this area is successfully crossed, the price may continue to rise to the next supply / resistance area.

There are 2 more terms that are not in the picture above, but they can show up, namely:

5. Weak Support, meaning that the existing demand / support area has been tested but only once, so the strength of this demand area / support is still in doubt. The opportunity to turn around or penetrate this area is still 50 – 50.

6. Weak Resistant, meaning that the existing supply / resistance area has been tested but only once, so the strength of the supply / resistance area is still in doubt. Just like weak support, the opportunity to reverse or penetrate this area is still 50 – 50.

Then, how to trade simply and easily using this supply and demand?

From the picture above, we can conclude that forex pairs are always testing or not at all areas of supply and demand. As traders, we can start entry as follows:

  1. If the price is around the demand / support area, then the entry is bought if the area is stated to be at least weak support. Stop Loss is placed at the lower limit of the demand area and the Target Profit is placed at the lower limit of the supply / resistance area.
  2. If the price is around the supply area / resistance, then the entry is sold if the area is declared to be at least weakly resistant. Stop Loss is placed at the upper limit of the supply area and Target Profit is placed at the upper limit of the demand / support area.
  3. If the price still does not touch one of the areas or areas that have formed untested support / resistance, then we should wait until there is clarity of direction and another supply area or demand area reappears.
  4. If it turns out that prices continue to pass through the area of ​​supply or demand, immediately change positions and entries follow the direction of the current trend. This happens if the momentum is very strong so that it successfully penetrates the area of ​​supply or demand.

Looking difficult? Actually, with a little practice the things mentioned above become easy to do. The steps above can be done with a number of trials in each trading panel.

The thing to remember in every trading system is that there is no perfect system. This trading system is equipped with a Stop Loss which functions as a brake if the price moves do not match the initial prediction. In addition, the set of Target Profit can be lowered if it turns out to be too far away or difficult to achieve. However, Stop Loss should not need to be changed because it will only be a mistake because the loss can be even greater.

The advantages of using supply and demand in trading, including:

  1. It is easier to see which areas need to be watched, both supply and demand areas. Compared to support and resistance that only rely on one price point, trading systems with supply and demand provide gap and range so that the traders can more clearly see the area.
  2. It is easier to set stop loss and target profit points compared to resistance support, because it can be placed above or below the supply or demand area. The level of precision becomes higher.

The disadvantages of this trading system include:

  1. It takes a long time to wait for supply and demand areas to be formed, even though indicators are already used. Indeed, supply and demand areas can form at any timeframe, but their accuracy is low. The minimum time frame that can be used is H1.
  2. The possibility to continue to be hit by a stop loss is very high if the pair continues trending. Therefore, quickly change positions if the area has been penetrated.

The choice depends on the traders, whether comfortable with the method of support and resistance or supply and demand. Basically, forex trading techniques using supply and demand are the development of trading support and resistance techniques. This strategy was developed to make it easier for traders to see important areas on a currency pair.

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