Inside Trade | Back to Basics – Demand and Supply

The extensive involvement of economics in the Fundamental analysis makes it a very essential topic for one's understanding of Forex. Moreover, its concepts are exemplary vital for forecasting the price of a currency. But before jumping in to the macroeconomic indicators of Fundamental analysis like GDP and inflation rate, better embrace the more basic concepts first – Supply and Demand.

Supply and Demand are basic concepts of microeconomics taught in college. But what we were taking for granted back then, especially if you're not business major, may very well be needed if you want to engage into trading.

Supply

Is a measurement of the quantity of a particular item available on the market within a particular time. It mainly depicts the availability of a good in a market. The larger the supply of a particular good is, the lower its demand thus lowering its value. Meanwhile, the lower the supply of a particular good is, the higher will its demand be thus increasing its value.

Demand

It is a measurement of how much quantity of a particular item that people are willing and able to buy. The scarcity of a particular item leads to an increase of value mainly because many are willing to buy but only few are available. On the other hand, the fewer the people willing to buy that particular good the higher will be the supply available on the market which would lead to a decline in its value.

Let us make an example. Imagine we are on a wet market and you want to cook a special dish for your love ones and its main ingredient would be prawns. Due to a storm, the supply of prawns are quite limited. Since the supply is limited and not everyone can buy it, some would be willing to buy it in a higher price than the usual just to acquire it. It will then make a chain reaction which will lift its standard price. Meanwhile, due to a high demand of prawns the fishermen were encouraged to look for prawns to gain a huge profit. But since most fishermen has the same idea, the supply of prawns continuously increased and resulted to a surplus. It then resulted to the decline of the price.

How will we relate this concept to Forex trading?

Let us substitute the prawns, given in the previous example, with a currency. Imagine you are an investor and you're planning to establish a business on a very promising country. Since there are many investors who have plans similar to yours, the demand for that currency increases leading to a limitation in its supply. As previously stated, the preconceived effect will be an increase in the currency's value, thus providing a significant pull in the price's tug-of-war.

Since this scenario, though essential to traders, is quite difficult to know. Certain signals and tools have been derived to assist traders in determining this factors. The support levels determines the demand of a particular currency while the resistance levels denotes the availability of supply. Furthermore, Oscillators signals if the pair is already overbought or oversold which means that there is either a scarcity or surplus of supply.