Supply and demand: two key elements in foreign exchange trading

The price of a financial asset is calculated based on two factors: supply and demand. These two forces are constantly lowering or raising the price of financial assets. Supply and demand are influenced by market sentiment, which in itself depends on a number of factors. This rule applies to all financial markets: the stock market, commodities, cryptocurrencies or even the foreign exchange market, the largest of all.

What is the foreign exchange market?

Currencies such as the euro, the dollar or the pound sterling are not listed on the stock exchange but on the foreign exchange market. This market is very liquid. The Bank for International Settlements estimates the volume of daily transactions at $ 6.6 trillion (2019 figures).

Many traders resort to the forex market. The market is volatile, so traders can expect good returns. Investment strategies differ from one trader to another, and everyone must find their own style of trading (e.g., daily trading, swing trading, or position trading).

What is the market sentiment?

Market sentiment reflects the “mood” of investors and traders in the financial markets. Helps identify bearish or bullish trends.

Market sentiment is an important component of technical analysis, that is, analysis that is based on mathematical charts or indicators. Some of the indicators used to assess market sentiment and predict the evolution of supply and demand include the following:

  • Commodity Futures Trading Commission (CFTC) Commitment Reports are published every Friday. These reports give an idea of ​​the positioning of the main operators such as banks and hedge funds;
  • the VIX or volatility index that refers to US equities;
  • moving averages;
  • the specific indicators offered by trading platforms.

Therefore, a trader will be able to get an idea of ​​the market sentiment and adjust his trading strategy through technical analysis.

Factors influencing market sentiment

As we have said, market sentiment changes supply and demand and therefore determines the price of a stock or the price of a currency. This market sentiment is influenced by a number of factors, whether rational or not. If we take the example of the euro-dollar pair in the foreign exchange market, we must take into account the following elements:

Two approaches to anticipating supply and demand

Many traders are interested in these items and spend time gathering information in order to anticipate supply and demand. On the other hand, others do not seek to understand what drives market sentiment but only to identify it to take advantage of it. Both approaches are the same and allow for results. Therefore, it is up to each individual to determine which style suits them best.

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