Price Waves

This constant movement between excess supply and excess demand is what causes Forex charts to move. This movement happens in waves. In the following picture we can see a good example of a price wave. Realize, of course, that this is a simplified example. In the real world price doesn’t bounce directly between two levels quite so cleanly.

supply_and_demand1

So different levels of supply and demand are what cause the price of a currency pair to move, but what causes the supply and demand levels to fluctuate? The number of people wanting to buy or sell the currency, of course! If most people want to buy then the demand (and the price) is going to go up, but if a lot of people want to sell then the demand (and again, the price) is going to go down.

If this is still confusing to you then just remember, the Forex market is no different from an auction. If you have one extremely sought-after classic car up for auction, with an audience of dozens of buyers (excess demand), then as the auction progresses the price of the car is going to go up. People really want that car, so they will keep bidding against each other at higher and higher levels until the prices start getting too high for the buyers (demand is now diminishing).

But what if the situation were reversed, what if you had the same car up for sale, but only one or two buyers came to the auction? Do you think your car would still fetch a high price? Probably not, since the demand is so low.

The fact that Forex prices move based on supply and demand makes our job as traders easy! All we have to do is figure out when a lot of people are going to want to either buy or sell a particular currency pair. This is easy to do because, as we’ve seen, prices move in waves, and waves are repeating patterns. It’s also easy because human action is driving the market, and human beings are very predictable creatures!

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