WHAT IS SUPPLY AND DEMAND?
The only reason why a price moves in any, and all markets, is because of the imbalance in supply and demand. The greater the imbalance, the greater the move in price.
WHY DO SUPPLY AND DEMAND IMBALANCES OCCUR?
The Currency and the Stock markets and the financial world in general is dominated and ruled by big investors, institutions, central banks and professional traders. They have the ability and capacity to move and change the markets with thousands of orders – These orders create the so called supply and demand imbalances. One single investor can change.
Supply and demand is one of the four major factors that cause both long-term trends and short-term fluctuations. The other three factors are governments, international transactions, speculation and expectation. Government mandates like interest rates or spending or tax policy, impact international transactions, which play a role in speculation, and supply and demand plays a role in each of these other factors. Changes in supply and demand create trends as these market participants fight for the best price.
- Daily news occurs and affects the world’s economies
- International transactions, balance of payments between countries
- Positive news usually increases demand, and reduces supply, leading to higher prices
- Negative news usually decreases demand, and results in an increased supply
The retailer and small investor ends up becoming the bait, the liquidity the professional traders need to fill many of their orders. They can’t sell if there are no buyers interested. Every trader/institution has a different perception of fair price and future value. Supply is simply the amount available, while demand is the amount that is wanted. Supply is the amount available at a particular price, while demand is the amount that is wanted or desired at a specific price.
As prices increase, a seller’s willingness to sell products will also increase. The opposite of this shows that as prices increase, we see demand reduces. Buyers will demand more when prices are lower. Learning a supply and demand strategy will help you locate turning points in any markets in a methodical and consistent way.
A REAL LIFE SUPPLY AND DEMAND EXAMPLE
We are really good supply and demand citizens in real life scenarios, we’re potentially great supply and demand traders able to learn a supply and demand trading strategy but when it comes to trading most traders will do exactly the opposite and trade against supply and demand, something they would never do when they want to buy a car, a cloth, a pair or shoes or a house.
Why is it that we are consistently going against supply and demand logic we apply so well in our lives?
Let’s imagine that your partner kindly ask you to go and buy some meat for dinner. You go to your favorite market and see the price of the steak you normally buy has almost doubled! It’s now going to cost you twice as much to enjoy your barbecue; you quickly begin to think how valuable that steak might be. You begin to look at alternatives, such as hamburgers or maybe a chicken breast; replacement products with which you can get a similar result at a far lower cost.
While you may decide to pay the increased price of that steak, you have to think of the market dynamics at work. Not every steak buyer would be interested in doing this; many would opt for replacement products because they could not afford the new higher price. This is a living example of a supply and demand. As the steak price increases, demand for steak decreases.
The next week you go to the same supermarket, and see that steak is half of what you normally pay for it; it’s 80% off of last week’s price. Will you now think differently to the previous week? You will be thinking that you can buy more while the price is cheap. Other customers are buying while price is cheap, you realise that if you don’t act fast, all of the discounted meat will be gone before you make up your mind! You could buy a few steaks and conserve them in the freezer.
This is demand at work again. As the price of steak lowered, demand increased, not only for you, but the market in general. This example is very similar to what we see on the Currency and Stock markets or any market.. The financial markets move trillions every day, and the reason for this is the heavy demand behind the traded assets. Currencies are the basis for the world’s economy. Whenever one economy wants to trade with another economy (provided different currencies are used) a Forex exchange will be required.
Unlike markets that are traded through an exchange, each Forex broker is essentially creating a market. More or less, the charts will look the same, but individual bars can be different and price patterns in particular can vary a little from broker to broker. Ultimately, the various markets created by the brokers will, to some extent, be arbitraged (the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.) so they stay close to each other. In the end you have to trade what you see on your charts and ignore everything else.
What we perceive as the personality of a currency pair is just manipulation. Some instruments have lower liquidity (some Forex cross pairs, exotic pairs and Stocks) zones are overshot and then price goes in the opposite direction. That is not the picture of “this instrument does not respect supply and demand” that is the picture of “this instrument is being manipulated, bear traps, and bull traps”.
The financial markets are traded by professionals and not by retailers, each of them has its own trading strategy, most of them time not a supply and demand trading strategy but some of these big players do create these imbalances. A hunter has all sort of traps to capture its prey, so do the big institutions. We are trying to combat professional hunters, as retailers we are their prey.
I hope you enjoyed our article. If you would like to learn more about how to make money with foreign exchange speculation or trading, then visit our website and Don’t forget to Subscribe To Our Youtube Channel!
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