Every Forex trader has one strategy they like to use. One of the most popular methods used is Supply & Demand, but many traders get confused between the concepts of Supply and Demand and Support and Resistance.
Now, what is the difference between those concepts? Support and resistance are levels or lines in which prices were already determined, while supply and demand are fresh levels or zones in which prices are not determined.
In the following article, we will expand on the topic. We also provide a video with examples so to clarify the explanation even further.
Supply and demand are the two factors that determine any price in the forex market or any other market. Supply and demand trading takes place when a currency pair reaches a level of friction referred to as a selling zone. This occurs when sellers decide there is a greater opportunity in selling at an inflated price. The opposite also happens when pairs fall to a lower level into a demand zone. In this case, buyers decide that there is a greater value in purchasing the currency pair.
The zones are observable places on the chart where price has neared multiple times before. Supply and demand are zones that are more specific and accurate on the charts. Support and resistance are wider areas regarding the price levels.
These two zones are often the most critical levels on the chart and probably the best levels to trade after they are created. These are levels that hold a huge amount of unfilled orders.
Supply and Demand zones represent a huge imbalance between sell orders and buy orders at a certain price level. The zones represent the movement of smart money.
These levels are created after a huge amount of orders are entered into the banking system, thus creating a significant imbalance between buying and selling orders. This massive wave of orders can be created by institutional fund firms, central banks, public banks, etc. Individual traders do not generally have the buying power to make such purchases and influence the market in this dramatic way.
After the huge imbalance between buying and selling occurs, as the massive wave of orders is placed, the price runs away from the original level very fast and ends up leaving many unfilled orders behind at the supply or the demand level.
The large institutions then wait with the expectation that their orders will be filled once the price gets back in the zone.
Support and resistance are significant levels in the price and a direct offshoot of supply and demand levels. In fact, all support and resistance lines were originally supplies or demand zones in which the price was already tested a few times. That is how support and resistance are created – they are essentially the confirmed supply and demand levels.
As mentioned earlier in the article, supply and demand are fresh levels or zones where a price has not been determined yet. Therefore, these levels are valid to trade.
Support and resistance are levels or lines in which the price was already determined and changed a few times, therefore making them less relevant to trade.
In this video, we show examples of each of the terms.
Demand level, which turns into a support zone
Supply level turns into a resistance zone
The method of supply and demand trading is basically to trade these levels based on the fresh price after these levels are created. Trading supply and demand only at the first touch is the most professional and safe way to remain profitable and obtain a great Risk Reward ratio.
Another nice benefit to supply and demand trading is that it offers a possibility of a break from the trading screen. Since price levels are predetermined, this means traders can set them and wait. This is great for traders who do not want to sit and monitor every single move on the screen.
Supply and demand prices also move quite logically. When traders buy and sell within supply and demand zones, there are clear motivations and machinations at play. This means that the price tends to move more logically. This is always applied to supply and demand because those are the most fundamental, sound principles in economics.
We touched upon it earlier, but trading support and resistance levels are riskier than trading supply and demand levels.
As much as the price tests the same level, the chances for breakout increase.
In our opinion, support and resistance levels are not the ideal levels to trade but definitely levels to act on while we are in a trade. They are good levels to roll stop loss or to close a position or part of a position.
In summary, all support and resistance levels were originally supply and demand levels where a price was already checked and confirmed a few times in order to fill previously unfilled orders. After the price was determined on these levels a few times, supply or demand became support and resistance. The bottom line is supply becomes resistance, and demand becomes support.
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