Want to Indulge in Forex Trading? Read This!
If you want to trade in forex, then you should understand what supply and demand forex trading is all about.
Let’s start with Demand and Supply Zones
When there is a strong uptrend in the market, buyers outnumber the sellers. During this trend, price moves up until there are enough sellers in the market to match the buy orders. The origin of the strong bullish trend is called a demand zone.
But when sellers outnumber buyers, the bearish trend is formed. Price continues falling unless there is a situation where buyers are flocking to the market again. The origin of a bearish trend wave is called distribution or supply zone.
How trends are created is best described by the accumulation and distribution theory. At the outset of the trend, price stays in the accumulation zone unless the larger players have built up their positions. You may assume that once price leaves the accumulation zone, all buyers might not have gotten the fill, and open interests are still there at that level. If you are a supply and demand forex trader, it will help you in identifying high probability price reaction zones.
What Happens in These Zones?
In a supply zone, there is a narrow price band in which the price tends to move up and down. There may be many candle wicks and the great movement often dissolves a supply zone. When the supply or demand zones are narrow before a breakout, there is a chance of a good reaction.
Most traders don’t like to see price spending a lot of time in the supply zone. The position accumulation takes its own time but just by seeing long ranges, you can’t conclude that institutional buying is there. Quality supply zones are typically narrow and don’t remain there for long. In a shorter accumulation zone, you can spot re-entries which increase the open interests.
The Spring Pattern
It is a price movement in the opposite direction after a breakout. It is a false breakout, and it traps the traders that are taking trades in the wrong direction. Institutional traders make use of the spring pattern to accumulate buy orders and then drive prices higher.
There comes a point when price moves out of the price zone and starts trending. If there is a substantial imbalance between the buyers and the sellers, it often leads to strong price movements. When the market moves to a bullish trend, and away from the bearish trend, there has to be a significant amount of buy interest in the market to make sure that all the orders are absorbed.
In The End
If you want to use the learning, then you can apply it in reversal trading. If you have identified the previous market turn, it is better to wait until price comes back to the same area. Supply and demand zones are helpful in profit placement, and they are great tools as well. You should place each profit target ahead of the zone. It will help you in protecting the profits that you have made.