What is Supply and Demand (Supply/Demand, S/D)?
Supply and demand are among the basic strategies used in trading. They are based primarily on ancient laws of economics and how prices are determined in a free market.
Demand and supply – definitions
Demand (denoted by the letter D from Demand) – is the amount of goods and services that buyers are willing and able to purchase at a certain price over a certain period of time.
Supply (denoted by the letter S from Supply) – is the amount of goods that sellers are able to offer for sale at a certain price at a certain time.
Basic assumptions
- When demand is greater than supply (D>S) then the price increases.
- When supply is greater than demand (S>D) then the price decreases.
- When the price increases, the supply increases, while the demand decreases.
- When the price drops, the supply also drops, while demand increases.
What is the law of supply and demand based on?
The assumptions of supply and demand are based primarily on the idea that the amount of an instrument that is available and the desire of buyers lead to price increases.
In practice, one identifies zones on the chart where demand exceeds supply (demand zone) and increases the price, or where supply exceeds demand (supply zone), lowering the price as a result.
What factors affect demand?
In addition to the obvious factor of price, there are two aspects that influence demand very strongly.
Willingness to buy suggests desire, based on what economists call tastes and preferences. In a situation where you don’t need or want something then you don’t buy it. This means that the prices of similar goods affect demand.
The second aspect that affects demand is the size or demographic structure of the population. For example, the more children there are in a family, the greater its demand for clothing.
What factors affect supply?
It is by no means just the price. For a change in the price of a good is not in itself among the factors that shift the supply curve, despite its effect on quantity.
Other factors will primarily include natural conditions, the impact of new technology on the production process, and government policies.
How can I use these rights for my own activities?
Based on the knowledge and experience of top traders, it can be seen that most of them wait for the right moment to enter the zones where the main buying or selling activities take place, before entering long or short positions.
What is worth keeping in mind when deciding to use the supply and demand mechanism?
In theory, it makes sense to buy in the demand zone and sell in the supply zone. However, it is worth remembering that fresh zones are much more effective than established ones. As a result, they can very often be used as entry zones for steady trends or as reversal zones for changing trends.
What tools are worth using?
One of the most recommended solutions is to use a smart drawing tool that allows users to visually identify these levels on the chart.
