Guide to Forex Supply and Demand Trading

Most traders prefer to trade using technical indicators such as RSI and MACD. Others love to use a simple graph to make their decisions. Without a doubt, support and resistance lines are a vital part of a trader’s routine. We want to expand your trading potential and therefore present you a guide to supply and demand zones in Forex trading. With the manual, you will learn how to identify and use the zones to your advantage.

Meaning of Supply and Demand Trading

The concept of supply and demand comes from economic theory. Supply is the quantity of goods available to users, while demand is the need for the goods. The more supply we have in the market, the easier it will be for the price of an asset to fall. On the contrary, high demand often increases prices due to customers’ need to purchase an item.

In trading, people use supply and demand as areas of resistance and support where the price of an asset can decline or reverse. They are similar to resistance and support lines at first glance. However, there are fundamental reasons for supply and demand zones to occur.

Supply and demand trading is about placing your orders according to the areas where the price tends to reverse due to various factors. Along with other trading techniques, supply and demand trading provides a comprehensive and powerful tool that can take your results to a new level.

Supply and Demand Trading Zones

A supply zone is where traders and investors try to sell an asset for fundamental and technical reasons. Some market participants are selling because the asset reached its target. Others do the same due to changes in the economic environment or news that has altered the outlook for an asset. Typically, the price reacts sharply to the supply zone, which means there is a lot of interest in selling.

The same goes for demand areas. A demand zone is a price area with strong buying interest below the current price action. Many investors do not want to buy an asset until it drops and reaches the demand zone because higher returns can be obtained in the portfolio. Looking at the chart below, we can see a lot of buying interest in the demand zone, most likely caused by a large volume of buy orders being at this level.

The most important thing to know is that supply and demand zones are an area of interest for several traders. Additionally, we will discuss the stages of trading with supply and demand zones. You will find that it is complete and easy to access.

How to Trade in Supply and Demand Zones

To plan your trades correctly, you must set an entry point and Stop Loss and Take Profit orders. At first, you should check the charts and find an asset that looks like this:

Next, we must establish the demand zone for the asset. Define the upper and lower borders of the demand zone by placing the support lines at the bottom of the chart. As a result, we will obtain the demand zone for the asset.

Next, we must define an entry point for the operation. We will talk more about various trading strategies later in this guide, but for now, let’s say that we are trading with the most common supply and demand trading strategy, which is range trading. Therefore, we will look for long entries somewhere in the demand zone. For the above asset (GBP/USD), the entry must be between 1.1408 and 1.2000. It is crucial for supply and demand trading to understand that when the asset goes down, the chances of it reversing are higher because there are more investors and traders who find the instrument valuable and oversold.

Supply and Demand Trading Strategies
Range Trading Strategy
The most typical supply and demand trading strategy is range trading. The rules are simple: find an asset with a strong supply or demand zone and enter the bounce. The recent movements in the EUR/USD pair can serve as an example.

Every zone that causes an upward movement is a demand zone, and vice versa. The pair has been moving from the supply zone to the demand zone. Thus, the trading strategy is based on waiting for the price to enter the zone and opening orders in the opposite direction.

The rules are quite similar to those of support and resistance trading, but the supply and demand zones are usually wider. In the case of the image above, it would have been smart to open short trades near the 1.0790 area and long trades below the 1.0660 line. Keep in mind that if the price breaks through the demand zone, it can quickly turn into supply.

Breakthrough Strategy

As always, supply and demand zones don’t last forever. At some point, sentiment changes, the market begins to quote new data, and the alignment of forces shifts from bullish to bearish and vice versa. Therefore, you must know how to use the breakout strategy when trading supply and demand zones. Here we have an example:

In the chart above, the yen touched the demand zone four times. After the sentiment changed, the demand zone lost its power and became a supply zone. This is why the USD/JPY pair plummeted below the area and retested before further decline. Notice the increase in volatility after the breakout. This can help us detect the difference between a true breakup and a false one.

The breakout strategy is a logical continuation of range trading due to the inevitable nature of markets moving from one consolidation to another. Therefore, the more touches of a supply or demand zone you see, the greater the chances of a breakout. As we mentioned above, pay attention to volatile movements
because they mean that the revaluation process has begun.

Use of Supply and Demand Zones as Risk Management Parameters

Supply and demand zones are very similar to support and resistance; Therefore, these areas indicate where the trader can place Stops and Limits orders.

These areas allow traders to implement a favorable risk-to-reward approach to trading. Range traders who sell in the supply zone can set stops above the supply zone and targets in the demand zone. Conservative traders can set the target above the demand zone or implement other risk management techniques.

Tips for Using Supply and Demand in Forex Trading Use Long-Term Temporalities to Identify Supply and Demand Zones

Supply and demand trading generally refers to identifying areas where the reaction is unusually strong. You can operate in smaller temporalities, but noisy and somewhat chaotic movements are very likely to occur. Large players such as institutional traders, banks and investors use longer time frames to eliminate unnecessary volatility. Therefore, it would be better for you to do the same and opt for less risky trades. Play big!

Identify Strong Movements Outside the Potential Supply and Demand Zone

Continuously monitor market sentiment and try to predict the possible reaction when the price enters a supply or demand zone. A volatile and sharp movement in the direction of the zone usually indicates a possible breakout. Thus, the asset could continue its movement in the same direction.

Use Indicators to Confirm Supply and Demand Zones

Indicators like RSI and MACD are extremely useful in identifying supply and demand zones. They can provide you with information about a possible continuation or reversal. If the price is moving in the supply zone and the RSI oscillator is not in the overbought zone, then there is a high probability that the asset will continue to rise. On the contrary, high numbers on the RSI chart along with a price reaching the supply area indicate a possible reversal.