When discussing fundamental analysis there are some core principles that we need to be aware of. Supply and demand are at the heart of fundamental moves in all markets including Forex. This is what we will take a look at in this Wiki.
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Fundamental Supply and Demand
When discussing fundamental analysis there are some core principles that we need to be aware of. Supply and demand are at the heart of fundamental moves in all markets including Forex. Think of buying as demand and selling as supply.
Demand
When we have a situation where buyers are more aggressive than sellers this means prices will likely be bid up and move higher. When we say bid up what we are referring to is a situation where buyers are more willing to “step up” their buy orders in the hopes of getting a fill on the long side. Going long is the same thing as buying. This is what we refer to as demand. When more people want to buy at the current price this will cause the sellers to raise their offers to accommodate for the higher demand. Essentially, when we have a high-demand situation buyers are more willing to purchase at higher prices and sellers are less willing to sell at lower prices. Aggressive buyers will simply lift the offers to get long instantly. The other reason someone would want to lift the offer is to get out of an existing short position immediately. If there is a very real reason for the market to be aggressively buying then you definitely do not want to be holding a short position against that positive sentiment.
Supply
On the other hand, if we have a market where the sellers are more aggressive than the buyers this means that prices will likely go down. This is a situation where we have more supply than demand. Buyers naturally want to buy at lower prices so they will lower their bids to accommodate for this influx of supply. In this situation, sellers will be more willing to step down their offers. Aggressive sellers will simply take the bids in order to get short immediately. The other reason someone would want to take the bid would be to get out of their existing long positions. The concept is the same, you don’t want to be stuck holding a position that is contrary to the current price move and market sentiment because you could wind up taking a much larger loss than you anticipated.
Equilibrium
At any one moment in time, the current price is thought to be the equilibrium between the forces of supply and demand. As new information is absorbed and disseminated into the market buyers and sellers will move prices based on what this new information fundamentally means to the value of the asset that they are trading. This happens on a tick-by-tick basis every day. Sentiment can and does change many times throughout a single trading session but to varying degrees.
For further information on Supply and Demand please check out our Wiki page devoted to all things Supply and Demand HERE.