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- The principles of Supply and Demand in the financial markets are similar to real-life economics of the laws of supply and demand.
- For example, if there is a shortage of egg supplies like we were experiencing in the UK, then there is less supply and naturally demand increases, thus the price of eggs will likely increase.
- Conversely when there was more availability of eggs (supply) than people willing to buy (demand), the egg prices were very low.
- Similarly, in the financial markets, if there is too much supply and less demand for the asset, then the price may fall, ie we open sell positions.
- Conversely, if there is too much demand and less supply of the asset, then the price may rise, ie we open buy positions.
- When there are more buyers than sellers in the market, this could indicate the asset is in more “demand” and the price may move towards the upside.
- When there are more sellers than buyers in the market, this could indicate the asset is in more “supply” and the price may move towards the downside.
- Strong supply and demand zones develop when there is a significant amount of buying or selling at a particular price range.
- One of the common strategies to trade supply and demand zones is simply to sell at supply and buy at demand.
- However, to increase your success rate in trading supply and demand, it’s important to execute strategically by possibly adding some more confluences to your strategy.
Here are a few examples of how supply and demand zones are well respected by Traders…
Below is a daily time frame of audusd, after the price bounces off the demand zone, there was a buy signal printed.
Then price moved all the way up, then bounced off supply zone and sell signal is printed.
Here’s another example of gbpjpy on a 4 hour time frame.
Price fails to break through the supply zone, indicating there are more sellers than buyers.
Then a sell signal is printed, followed by a massive decline of the asset over a 5-day period until it reaches a demand zone.
As you can see, supply and demand zones are well respected by Traders.