In this article, we will look at concepts that are important not only in trading but throughout economics in general - supply and demand. As always, in this article, you will find detailed answers to questions such as:
What are supply and demand? How to calculate supply and demand for a currency? How do supply and demand work in the real world? How to trade using supply and demand? What are the supply and demand zones? I will also share my opinion on this issue and offer you a fairly simple trading strategy.
There is no point in talking about using supply and demand in trading if we do not understand the essence of these concepts. Most educated people are familiar with these concepts from university economics classes. Today the fundamentals of economics are taught even in schools, and I taught this course in several educational institutions.
Before we approach the market adaptation of these laws, let's look at these concepts from the perspective of the primary source, namely, the classical laws of economics.
Demand is a request of an actual or potential buyer or consumer to purchase goods for the means available to them, which are intended for this purchase. Demand reflects, on the one hand, the buyer's need for certain goods or services, the desire to purchase these goods or services in a certain amount, and, on the other hand, the ability to pay for the purchase at a price that is within an acceptable range.
Supply is the opportunity and desire of the seller to offer their products for sale on the market at certain prices. In quantitative terms, supply is characterized by its size and volume. The volume or size of the supply is the amount of the product (goods, services) that the seller, in accordance with the availability or production capabilities, wants and is able to offer for sale on the market for a certain period at a certain price.
As we can see in these definitions, in essence, supply and demand are a state of opportunities between buyers and sellers at a certain point in time.
Based on these definitions, we have two basic laws of economics - the law of demand and the law of supply. I will not describe these laws in full, but rather only try to convey the essence. The essence of the law of supply is that the higher the price of a product, the higher the supply of that product.
The law of demand says the opposite - the lower the price of a product, the greater the desire of the buyer to buy this product. We encounter these laws all the time in our everyday life. If you are a buyer in a store, you want to buy goods of the quality you need at the lowest possible price, and if you are a seller, your interest is to sell your goods at the highest possible price.
Also, there is a concept of satisfaction with supply and demand. This means that supply and demand cannot grow forever. Sooner or later, a moment will come when there will be a turning point in the trend, or the price of a product will become so high that there will be no one who wants to buy it or vice versa, there will be very few goods at a low price and too many people willing to buy them. Continue reading on LiteFinance.