How to Calculate Supply & Demand in Forex
Forex is often a fast moving market that can trend strongly either upward or downward, but many Forex traders don't understand how to time these moves because they don't comprehend how to calculate supply and demand in Forex. Supply and demand in Forex trading is often misunderstand, but by gaining an understanding of the relationship between price and volume, you can begin to understand supply and demand and profit from it.
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Instructions
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Log on to a free charting service such as freestockcharts.com. Press the "new chart" button and a price screen will pop up on your screen. Input the symbol of a currency pair that you are tracking such as the U.S. Dollar/British Pound, for example.
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Select the indicator button above your price screen and select the trading volume indicator that will appear at the bottom of the screen. Trading volume will reveal the buying and selling volume on the daily price bars, which will help you determine supply and demand.
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Analyze the trading volume to determine which bars represent buying days and selling days. This will be revealed in the trading volume below the price bar by appearing green or red for that day. Green will represent positive buying volume and red will represent negative selling volume for the trading day. Make note of the trading volume for that price bar.
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Observe the corresponding price action and to determine supply and demand for the Forex currency. If the trading volume is positive and the price bar has traded higher than the preceding trading day then the demand is higher than then available supply causing the rise in value. Conversely, if the trading volume is negative with the price bar trading lower than the preceding trading day then the demand is lower and supply is too high causing a decline in value.
Spot price action as it moves upward through the current price point on higher volume. This means that the value of the currency is determined to be higher as more traders are taking positions which mans higher demand. Since there is a set limit to the available supply the value for the currency will go higher to meet demand with will be reflected in the increased trading volume.
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Tips & Warnings
Study the relationship between price and volume as outlined above and you will come to understand how to calculate the value for the Forex currencies. As you grow in skill at gauging price/volume you can determine when demand outstrips supply or when supply outstrips demand.
The Forex is volatile so be sure to always have a plan for risk control and to minimize your exposure if the trade goes against you. Use stops just below support and just above the high of tight trading ranges when entering a breakout move.
