In this article, we will look into one of the titans of technical analysis. The principle of Forex Supply and Demand, and how we can use this established principle to improve your trading results by increasing both the probability of trades as well their profitability.
But before going in-depth into Supply and Demand in Forex, I will provide a little history of where Supply and Demand originated from.
The principle of Supply and Demand is one that has been studied for as long as there have been markets, with some references dating back over 2000 years.
The first known published use of the Phrase “Supply and Demand” can be found in Sir James Steuart’s 1770 publication – An Inquiry into the Principles of Political Oeconomy: Being an Essay on the Science of Domestic Policy in Free Nations.
While he focuses mainly on the effect of Supply and Demand with regard to the labour force, the points he outlined set the groundwork for a principle that would forever change how speculators and economists alike viewed any market.
In 1776, Adam Smith wrote in his publication – An Inquiry into the Nature and Causes of the Wealth of Nations; that the market price is regulated by the Demand – the need for the commodity and the Supply – the abundance or scarcity of the commodity in proportion to the need for it and the riches of those who demand it.
If the commodity is scarce, the price of the commodity increases. But if the quantity is more than sufficient to supply the demand, the price decreases.
So, as you can see from the definition above, the Supply and Demand principle is mainly applied to commodities because commodities can be scarce, and their scarcity and how much there is demand for them can affect prices (think of Oil, for example, Wheat, or Soy Beans). However, its principles can also be applied to forex.
