Supply and demand: two key elements in forex trading

The price of a financial asset is calculated based on two factors: supply and demand. These two forces constantly drive the price of financial assets up or down. Supply and demand are influenced by market sentiment which itself depends on a series of factors. This rule applies to all financial markets: the stock market, commodities, cryptocurrencies or even the forex market, the biggest of all.

What is the forex market?

Currencies like the euro, the dollar or the pound sterling are not traded on the stock exchange but on the forex market. This market is very liquid. The Bank for International Settlements estimates the daily transaction volume at $ 6.6 trillion (2019 figures).

Many traders look to the forex market. The market is volatile, so traders can look forward to good returns. Investment strategies differ from trader to trader and everyone has to find their own trading style (for example day trading, swing trading or position trading).

What is market sentiment?

Market sentiment reflects the “mood” of investors and traders in the financial markets. It helps identify downward or upward trends.

Market sentiment is an important component of technical analysis, that is, analysis that relies on charts or mathematical indicators. Some of the indicators used to assess market sentiment and predict the evolution of supply and demand include the following:

  • the Commitment of Traders reports from the CFTC (Commodity Futures Trading Commission) published every Friday. These reports give an idea of ​​the positioning of large traders such as banks or even hedge funds;
  • the VIX or Volatility Index which concerns US equities;
  • moving averages;
  • the specific indicators offered by the trading platforms.

A trader will therefore be able to get an idea of ​​market sentiment and adjust his trading strategy through technical analysis.

Factors influencing market sentiment

As has been said, market sentiment modifies supply and demand and therefore determines the price of a share or the price of a currency. This market sentiment is itself influenced by a set of rational and unreasonable factors. If we take the example of the euro dollar pair on the forex market, the following elements must be taken into account:

Two approaches to anticipate supply and demand

Many traders are interested in these elements and spend time collecting information in order to anticipate supply and demand. On the other hand, others do not seek to understand what drives market sentiment but only to identify it to take advantage of it. The two approaches are equal and allow to obtain results. It is therefore up to everyone to determine which style suits them best.

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