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Currency movements are very common in the economic market. There are several factors that influence currency movements. One of them is the determination of supply and demand.
When there is positive news, demand will increase and supply will decrease. And vice versa. So this time, we will discuss what supply and demand are.
Supply and demand refers more to the amount of goods. For supply is the amount of goods available, while demand is the amount of goods desired. To find out more about supply and demand, you can understand it through the article below.
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Before that, invite your friends to join GIC and become IB Affiliates to earn income at every level.
Understanding Supply and Demand
The law of supply and demand is a theory that explains the interaction between sellers of resources and buyers of those resources. This theory explains the interaction between the existence or availability of a product and the demand for that product against the price of a particular product. As previously mentioned, supply is the total amount of goods or services that will be sold or when offered by producers at various price levels.
In a law of supply, the amount of goods offered itself will always be directly proportional to the prevailing price. This means that if the price of the goods increases, then the amount of goods that will be offered will definitely increase.
And so it is better, if the price of the goods decreases, then the amount of goods that can be offered will decrease. These two laws have interacted to be able to determine the actual market price and also the volume of goods traded on the capital market.
Several independent factors can influence the form of market supply and demand, which can affect the price and quantity that occurs in the market. The market that will reach an equilibrium point is where supply is equal to demand (there is no excess or shortage of supply) at a given price point.
At that point, the utility of goods for consumers and the profit of producers reaches its maximum point. The concept of supply in economics is very complex with many formulas, practical applications, and also contributing factors.
Supply itself can refer to anything that has been requested (demand) that will be sold in a competitive market. The term supply will refer to goods and services. Rules and governments related to the economy can also affect supply and also the number of suppliers or the number of suppliers.
This will affect the number of competitors in an industry. For example, environmental laws where the extraction of petroleum is regulated can affect the supply of petroleum.
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Differences Between Supply and Demand Indicators in the Stock World |
Factors Affecting Supply and Demand
In the world of economics, the supply and demand factor has several important roles. By knowing what factors can affect supply and demand, it will be very useful to be able to estimate the increase or decrease in the price of the goods.
In this discussion, we will discuss what factors can affect supply and also what will affect demand. Factors that affect supply include:
Related Product Prices
The existence of products that are similar to other products, especially on goods that can be used as alternatives, will more or less affect the amount of supply on the market. So the price of a product that is increasingly expensive will increase the supply of goods that will later be related to the goods that are increasingly expensive themselves.
Production cost
The amount of production is determined by the cost of production. The high cost of production can be a challenge for production companies and it can also cause the supply of the goods to become increasingly small.
Technology
The use of high-tech machines itself can make the cost of production become less and less. This can increase the results of production. The number of goods to be offered can be more at a certain price.
Number of Producers
The more the number of producers, the more goods that can be offered. Conversely, if the producers are fewer, the number of goods that can be offered will also be fewer.
Natural Factors
Nature itself is a significant factor that can affect supply in a fisheries or agriculture sector. For example, due to bad climate, many rice farmers will experience crop failure.
This can result in a decrease in the supply of the amount of rice. After knowing the factors that can affect the supply, then we will study the factors that affect demand, including the following:
Price
Consumer demand itself will always depend on the price of an item. Here, consumers will tend to limit themselves from buying an item if the price becomes very expensive.
If this continues for a long time, it is not impossible that consumers will prefer a substitute item that is cheaper than the original item.
Consumer Purchasing Power
The next factor that will affect demand is the consumer's purchasing power. The level of income of the community itself will also determine the value of its purchasing power. So, if the higher the income level, the more demand for consumer goods.
Consumer Taste
Furthermore, there are also consumer taste factors that can affect the demand factor for an item. Sometimes consumers will change their tastes as their income increases.
Those with high incomes will buy an item with better quality than what they usually buy. This will greatly affect the demand for an item on the market.
Number of Consumers
The increase in the number of requests for goods will not be directly related to the increase in population. But indirectly this will affect each other because with the increase in population, the need for goods will also increase.
This can later increase the demand for products that will increase along with the increase in people's purchasing power.
Future Expectations
People's expectations about future conditions can also affect the amount of demand for goods. Especially at certain moments. They would prefer to be able to buy it now rather than to buy it in the future when the price becomes more expensive.
How to Calculate Supply and Demand
The function of demand itself is a function that will show a relationship between the quantity of goods or services requested by consumers and the price of the goods or services. The function of this demand will actually obey the law of demand, where when the price of goods increases, the quantity demanded will decrease.
While when the price of goods decreases, the quantity demanded will increase. This will illustrate that the price of goods and the demand requested will have a negative relationship with each other. That is why, it is not surprising that a function of demand is always negative.
For the calculation method, you can see a form of the following demand function. The following is the form of the demand function: P = a - bQ Q = a - bP With the following information:
- a = constant
- b = slope/gradient
- P = price of goods per unit
- Q = quantity of goods requested
The function of supply itself is a function that will show a relationship between the price of goods on the market and the quantity of supply offered by producers. As mentioned in a law of supply, where when the price of goods and services increases, the quantity offered will also increase.
And when the price of the goods and services falls, the quantity offered also falls. This can show that the supply and the price of the goods being offered always have a positive relationship. That is why the function of the supply will always be positive. The following is the form of the supply function: P = a + bQ Q = a + bP with the following information:
And when the price of the goods and services falls, the quantity offered also falls. This can show that the supply and the price of the goods being offered always have a positive relationship. That is why the function of the supply will always be positive. The following is the form of the supply function: P = a + bQ Q = a + bP with the following information:
- a = constant
- b = slope/gradient
- P = price of goods per unit
- Q = quantity of goods requested
Meanwhile, the equations for the demand function and supply function are as follows.
P - P1 = Q - Q1 P2 - P1 = Q2 - Q1 With the following information:- P = price
- P1 = initial price
- P2 = final price
- Q = quantity
- Q1 = initial quantity
- Q2 = final quantity
Basic Concept of Supply and Demand in Forex
Basically, supply is the amount of goods that are available at one time in the market, while demand itself is the amount of goods desired at one time. If an item has experienced an increase in its supply, while the amount of demand will remain stable, then from the trader's side, there will be no cycle of money exchange and also renewal of goods, or in other words, he will lose because the goods are not sold.
In order not to experience a loss that is increasing, traders will lower the price of the goods they sell so that the interest of their buyers can increase again. Likewise, the lack of availability of goods and also high demand will increase the value of the goods. Likewise with forex instruments. In the EUR / USD currency pair itself, the price of the Euro against the US Dollar will be symbolized.
If EUR / USD is currently experiencing a decline, then most people can assume that the USD is strengthening. In fact, the price can fall because it does have a supply of Euros that are piling up, while the demand for Euros will decrease. In forex language itself, it could be said that traders buying Euros will decrease and traders buying US Dollars will increase.
Supply and Demand Strategy in Forex
After knowing how to calculate supply and demand, there are strategies that you can apply when making forex transactions. In the strategy based on supply and demand itself, there are two things that you can use as a basis for entering the market. The two types of entry are:Understanding Breakout Entry Types
In breakout entry, the order will be executed immediately when the price has successfully broken through a support or resistance. This type of entry is usually used for trading systems using Channels such as Donchian Channel, Bollinger Bandss, or Chart Pattern. Breakout entry in forex trading can make traders analyze and get information when the price is rising.That's why traders should understand the types of breakout entries in the trading business. Traders can use breakouts as a medium for detecting the value of movements up to a certain level. It's just that the weakness of this type of entry itself is a false breakout. False breakout itself is an event that initially reflects a price breakout from support or resistance but then fails because the price cannot maintain its existence outside of support or resistance.
Entry Pullback
Pullback is a way to enter after a breakout occurs. To enter this way, you must wait first before entering a position. Although the breakout cannot be confirmed as valid or not, by waiting until the price pulls back, you will get a better price with lower risk and higher reward.
Just like any other business where there will always be a risk of loss or bankruptcy. Of course this can also happen when you play in the trading world, the price and value of assets can experience a pullback. Therefore, it is important for traders to always use a consistent market and not try to move around. However, pullback entry still has weaknesses.
The downside is that traders cannot predict when and how far the price will pullback. Prices sometimes continue to move after a breakout and pullback traders will not get their share. If you already know about the supply and demand strategy in forex, also fill out GIC's internal survey so that our platform can also experience further improvements from the survey.
Beginner Supply And Demand Trading System
This time we will discuss one by one about the example of the Use of Supply and Demand in the trading system for beginners. In a trading system, several components are required that are mandatory and must not be violated. These components are market filters, trading setups, and entry and exit rules.Market Filter
In filtering the market, first mark the existing balance zone from a large time frame such as 1 day or 1 week. From there we will get a big picture of the market that we will enter later. Let's take the example of EUR/USD on the time frame. If the price is currently in its weekly balance zone, then you just have to determine what type of trader to choose.
If you want to swing trade, then you should use a 4-hour time frame and above. If you are an Intraday trader, use a 1-hour time frame. For example, if you are an Intraday trader and will choose a 1-hour time frame. Later you will see how the price moves from one stop to another.
This movement is also blocked by the weekly balance zone which is marked in blue. With a market that is currently consolidating heavily like this (weekly time frame), we can make repeated entries from one stop to another.
Setup Trading
The setup conditions that we expect should follow the direction of the big trend as much as possible. The most appropriate condition is if the big time frame is trending up, then you can look for a buy setup. Likewise, if the trend is down, it is advisable to look for a sell setup. However, if you can find a stop in the big time frame, you can execute buy and sell on each side.Entry and Exit Rules
As explained above, entry is executed using the breakout or pullback method. You are free to choose one of these types of entry. As a suggestion, you can pay attention to the previous momentum candle example. A valid breakout is usually marked by a large, upright momentum candle.
The exit rules in beginner supply and demand trading are very simple. Stop Loss is placed slightly below or above the balance zone, while Take Profit is placed in the next balance zone. The use of trailing stops or moving the Stop Loss level is also allowed.
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Tips for Using Supply and Demand for Forex TradingThere are tips that you can apply when using supply and demand when trading forex. These tips are:
- Use a longer time frame to identify supply and demand zones. By widening the view, traders can get a better view of areas where price has previously bounced. Be sure to use the appropriate chart when switching between time frames. Draw rectangles to indicate these zones. These supply and demand zones do not have to appear together - often a currency pair can reveal one or the other.
- Identify strong potential supply/demand zones. Certain price levels offer value to bullish or bearish traders. Once institutional traders and large banks see this value, they will capitalize on it. As a result, price action tends to increase relatively quickly until the value is either reduced or fully realized. Witnessing multiple examples of this at the same price level increases the likelihood that it is an area of value and therefore a supply or demand zone.
- Use indicators to confirm support and demand zones. Traders can combine daily or weekly pivot points to identify or confirm supply or demand zones. Traders should look for support and resistance levels to align with supply and demand zones for higher probability trades. Additionally, traders can use Fibonacci levels for greater accuracy on potential reversal points in supply and demand zones. The 61.8% level is considered a significant level and corresponds to an existing supply zone.
