Supply, Demand, Price and Speculation


Interesting thought. 99% of traders would say that price is the most important factor in trading. What if I say that direction and movement of the price is more important regardless of the current, starting or end price of the wave. Let’s put this thought into perspective.

Tourism is a small portion of the reason why foreign exchange markets fluctuate, because tourism adds to supply and demand of the currencies. A tourist has to engage in foreign-currency-exchange-transactions regardless of the price. Ok the quantity might slightly depend on the price IF there has been major volatility in the recent past. Nevertheless a tourist has to buy the necessary amount of currency used at his destination-country.

Likewise forex transactions that happen as a result of international trade has to be processed by companies, banks and governments regardless of getting a better price. The forex market does not necessarily move because of speculators.  In fact, its the other way round. Speculators speculate the market movement that is initiated by the real, solid supply and demand of the currencies. At least that is my understanding.

So, do you see what I’m getting at?

I believe its a whole new method of dissecting the markets. Simply because it completely disregards the single component that is ought to be the most important in any forex market.

This is also one of the reasons that make fundamental analysis a crucial component in trading. Although my personal trading strategy does not include fundamental analysis, I refrain from trading when major news events occur. News volatility is also proof that price is irrelevant for trading.

Markets move because of various reasons and price is not one of them. Price is just the scale to measure market movement and its no more important than actual volume.

In plain simple terms:

“Price is determined by supply and demand at any given time. But (this is a huge BUT) it does not imply that supply or demand is in any way determined by price.”

This presumed belief of an implication that does not exist, could be the reason for the demise of more than 90% of the retail traders.

In support of this argument I have also written an analogy of a market gap at the Monday open.  Check it out : EURUSD Monday Gap

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