How Supply and Demand Works
The difference between supply and demand and support / resistance seems very small.
But a Trader who understands the difference between both and knows how Supply and Demand works precisely can develop a trading strategy that’s great!
I also use Supply and Demand in my own strategy.
Supply and Demand Analysis
Supply and Demand is a strategy that analyzes how the market moves.
Price lists and areas where buyers and sellers get into action on each price chart.
These points are clearly visible and can be seen on each chart.
These areas are usually also called Supply and Demand areas.
The experienced trader can respond well to this, where the amateur trader often fails to recognize these points properly.
Often traders also think that the more often the price shows an area the stronger it is, but this is not entirely true.
Just look at the example below.
What makes the price go down is an imbalance between buyers and sellers and there is more selling activity than buying going on. And when the price comes up there is more buying activity.
When price reaches the support level, buyers enter the market again and outnumber the sellers.
Then, the price goes up until sellers become interested again and drive the price down.
This is a very basic view but it explains how markets move.
Each time the price moves back to a support level, there will be fewer and fewer buyers because everybody who wants to buy execute there trades now.
This is called order absorption.
Supply and Demand Forex Education
If everyone has bought and there are no buyers left over then the support level will break and the price will fall at a price that the buyers are again interested in buying.
Think of order absorption around a price level like a ball that bounces off the floor. Each time the ball hits the ground, some of the energy is absorbed by the floor. Thus, each consecutive bounce will be lower than the previous one until all energy is gone and the ball comes to a standstill.