The Forces of Supply and Demand

The Forces of Supply and Demand explained by professional Forex trading experts the “The Forces of Supply and Demand” FX trading team.

The Forces of Supply and Demand?

As prices dance around on charts, traders are often looking to a number of reasons to explain price movements. And often-times, a number of reasons can be associated with these types of changes.

Supply and Demand Spelled Out

Supply is simply the amount available, while demand is the amount that is wanted. Think of supply and demand in the most simple of terms, from the standpoint of any market where buyers and sellers exchange goods. Let’s, for a moment, imagine that you are selling oranges from your own farm at a local market. And you don’t necessarily have to sell all of your oranges, because, after all, you can eat them just as easily as anyone that buys them from you.

But the higher price you can charge for your oranges, in general, the more willing you would be to part with them. If oranges are only fetching 1 dollar per bag, you might be willing to sell 4 or 5 bags. But as price goes up, you decide to make more available. All the way up to 10 dollars per bag, at which point you are more than willing to sell every last orange you have because you can easily take all the money you made and buy something else to eat.

Supply and Demand in the Forex Market

The analogy of oranges at a farmer’s market is not all too dissimilar from that which takes place every day in the currency market. In some cases, these forces are moving at such high velocity that new traders can have difficulty understanding the granularity of the details; but rest assured – the forces of supply and demand run true to markets whether you’re looking at a tick chart or real estate prices.

The FX market is one of the most voluminous on Earth, and the reason for that is the heavy demand behind the traded assets. Currencies are the basis for the world’s economy. Whenever one economy wants to trade with another economy (provided different currencies are used) an exchange will be required.

Supply and Demand at Work

Imagine that the Reserve Bank of Australia enacts an interest rate change. An entire chain reaction will be set in motion due to the forces of supply and demand. When rates increase, rollover payments also increase. This means that investors that are holding the trade open at 5pm Eastern Time will receive a higher rate of interest than they would have previously. Incentive has just increased.

So naturally, more traders will want to buy; and fewer traders will want to sell as the opportunity cost of doing so (the rollover payment) has just gotten more expensive.

The Forces of Supply and Demand Conclusion

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