Supply and demand

Seeming as the market is generally driven up or down by supply and demand i want to know how can you calculate the supply and demand for a currency at a certain time?

That would be pretty tough. Forex is traded OTC (over the counter) so that means that there is no centralized exchange for it, so this isn’t the kind of data that you would be able to retreive from an exchange somewhere, so there are two ways of going about it:

  1. T[I]he hard way[/I]: Personally (or have an assitant do it) call up every bank, country, broker, and exchange and ask them to send you the statements for every monetary transaction in the world.

  2. [I]The easy wa[/I]y: Open a forex trading account, it can be demo or live, open a chart and if the price is going up for a currency, the demand outweighs the supply. If price is going down, the supply outweighs the demand, relative to the previous time periods of course. Overall, you can see which currency has the most supply or demand by seeing which currencies are worth more than others, once again with a simple price chart. :smiley:

Happy Pipping,

Volume and SD are often confused. SD is a basic and simple economic principle. Google it. Applied to trading its distilled down to basically what the previous poster says in a nutshell. All the candles on the graphs and any volume that could be measured if it were measured are all past events and therefore not SD. Then too SD itself is easily misunderstood as a quantity of buyers and sellers and this too is a misnomer as well as the quantity of buyers and sellers is not as relevant as the quantities being bought and sold is. So what makes all this so difficult for us screen based traders is the fact that we are shown everything we don’t need to see and its pretty much illegal for us to see or even be shown what it is we really need to be shown which is the actual orders. Now, your broker they can see everything. The markets orders, your orders and your stops and everything. So if anybody thinks trading of any kind is easy you are way big mistaken. If anybody tells you its easy, LOL. The second largest industry here is education. If you can’t trade and make no mistake most can’t then teach others how to do what’s nearly impossible to do. LOL I did say nearly impossible. But make no mistake, it is hard. Economic principles or even a degree in it. A good analogy to trading is that old movie “Predator”. Watch the movie and think about trading as trying to avoid being eaten by a vicious and invisible predator. Every trade you put on gives away your position and you can’t see him just walk right up and take your head off. These are the financial markets you are dealing with. However, just like in the movie with the hero there is a way to win but it is a struggle still. It can be and is taught but teaching is easy. Understanding and learning is the difficult part largely due to built in preconceived notions that we can’t just set aside. My advice to anyone is basically get an understanding of order flow and the mechanics of the exchanges themselves and what they are doing. Understand what your broker is really doing. Its the institutions that are being served by brokers and exchanges and they are being served us screen based retail traders.

Bravoooooo!!

Excellent answer.

I should add that volume is not centrally calculated but you can still see volume for each brokerage for a particular currency pair…For example, since last year, FXCM introduced Real Volume to chart software, and it does allow you to gauge volume strength in relation to price moves,candle by candle… This is a useful way to sense the strength of things like ‘bounces’ off a particular level, or breakouts: are they real moves with momentum, or false moves without continuation potential?

You can calculate it by doing volume spread analysis. Look up threads on this forum on how to do VSA, I personally recommend Petefaders thread.

You can also approximate volume/orders (but surprisingly well, especially on timeframes of M30+) by looking at the corresponding closest-contract forex-[I][U]futures[/U][/I] volume, if you really want to. But again, as mentioned above, don’t confuse volume with supply/demand (I prefer, myself, especially in a forex context, to think of it as “buying pressure” and “selling pressure”, but that’s perhaps being pedantic.)

IMO volume is totally irrelevant in forex or anything else because how many lots were already bought and sold at any price point has zero bearing on how many will in the future be bought and sold at that exact or any other price point. Even if you know the quantity available either for buy or sell at a particular instance it doesn’t hint at how many will come into the market at any time ever.

What is useful is being able to locate a SD imbalance on a price chart. Which is often surprisingly easy. But think about it volume, from any source, regardless of how calculated is irrelevant. Hypothetical example is an order to buy 100 lots at price x.xx hits a market and there just happened to be 5 lots for sale at that price point and no other orders to buy any lots or sell any lots. Lets ask and answer some questions here. Volume? Was that a single transaction or five or six? How many buyers and sellers were involved? Two? Five? 6? 4? Who knows? Doesn’t matter anyway but it could be a single buyer and a single seller or as many as five sellers or any combination of buyers and sellers. Still, it doesn’t matter. So what does matter? The SD imbalance that exists there at that price point is all that is relevant IMO. There is an unfilled order there still. How can you tell? Volume? Number of buyers and sellers? My guess is neither one. Well I did tell you so you know that way. But your broker ain’t going to do that. So looking at a price chart how do we know there is an unfilled order at price x.xx for 95 lots? The real answer is we cant. Its not possible. There lies one problem in what we all strive to do. A big problem really.

Well now we have an order at price xx.xx to buy 95 lots and no other buy orders or sell orders at that price point. This is a SD imbalance right? This is where we are supposed to be able to make money. According to SD theorists theoretically I too should be able to put in a buy order here and make some money because price is supposed to go up right? More demand than supply?

Well I got some news for you. Its not quite that simple. Its not that simple because you are dealing with a machine that gets paid to fill orders. The only way price is going up is if there are more sell orders above price point x.xx than there are buy orders below price point x.xx. In this particular scenario price is most likely going down anyway. At price point x.xx the biggest order is for 95 lots right? A limit order says your price or better. What’s better on a limit buy order? Lower price.

The exchanges skew the SD principal. Turns it upside down really as you and I think about it. So its sort of an inverse perspective really. I have proof but no way to show you just yet. I’ll try and figure a way though. But if you Google depth of market or level ll quotes you will find some YouTube showing what I’m about to described to you. Anyway on August 6th a few days ago it was a strong down day in the equities markets. Yet on the level ll screen there were nearly twice the bids as there were offers. Yet price went down and went down hard. So nearly twice the demand as supply and the S&P drops like 25 points from the previous days close. That is exactly opposite of how we think of SD. Price was supposed to go up but it didn’t.

To the exchanges that day the biggest orders were buy orders and guess what??? the lower price got the greater the demand got. On the surface its assbackwards ain’t it? But not really.

Ok I gotta stop here for now but look forward to more discussion.

Nohow.
To the moment you calculate those two price will be already somewhere else :slight_smile:
You can use Tick Volume as indicator of a trend beginning but the Tick Volume is local (data comes from particular LP) so it may show skewed picture of market sometimes

Final thought: if anybody thinks that volume is ‘irrelevant’ to forex, please read this thread now:

http://forums.babypips.com/forextown/66260-brief-share-questions-around-volume-any-contribution-welcome.html

Nice reply…

The narrow spreads and liquidity are the only benefits to volume really. Anything else is an illusion. The number of participants is irrelevant for certain. Quantities traded is irrelevant without knowing quantities available at that price point and there is no way you can legally have that information. Quantities traded already doesn’t give any clues to future supply or demand anyway. Its only the fact that there is an imbalance really that matters and while that can be pictured on a graph it can’t be measured volume wise by any method I’m aware of. Even if it could it wouldn’t matter. One last note is that while the picture of SD imbalances can be detected there is no way to know the depth of the market at that price otherwise we wouldn’t need stops.

Hello P.James.Lamar,

and first of all thank you for your previous, lengthy post, which makes perfect sense to me; my point on

volume being relevant to Forex is perfectly expounded on in the thread by Emeraldorc that I posted a

link to earlier in this thread, where essentially he and I, and GP00053 (and others) discussed the value

of Volume Price Analysis (VPA for short) in relation to volume versus price movement.

The depth of the market is irrelevant, in VPA, because what you are looking for is how volume size relates

to price movement: if, say, on the hourly chart you saw a currency pair making three very long bullish

candles, the last of which breaking through a ‘significant level’ (e.g. a round-number level), but there was

no relatively large and increasing swell in the volume bars, or even, there was an inverse movement

(i.e. price moved bullishly but volume bars decreased in size), then this would be a false move, according

to V.P.A.: while reading the future is not for traders, what this situation would warn you against would

be to enter based on the bullish candles, because the fading volume would sound warning bells and tell

you to wait for the following candle… Often, a false move like this will result in price retreating, especially

if coming up to a major level without the necessary volume behind it, so you would not want to get into

a position at this point, as the move would be too weak.

I always check volume (if available from the broker) when price makes a significant enough move and

I am considering trading that move, because if there is a lot of volume but a small candle, or small volume

and a large candle, then this says that the move is false… This is Wyckoff theory pure and simple, I did

not make this up :slight_smile:

hello pip and thanks for being a gentleman in the discussion by the way. Some folks forget their manners when they are not agreed with. If what you are doing works for you then it is right as rain. LOL if a religion has no power it is false pure and simple right. It is funny because you guys and I are polar opposite in our beliefs and that’s ok. I manage to trade successfully every day with what I do and I do not use any of that stuff. I generally have volume on the bottom of my chart to help separate the days but that’s literally it. I do not use the volume for anything I don’t use any indicators or anything of that nature. So while I really cant prove you right or wrong it doesn’t matter. I suppose the more appropriate thing for me to say was the volume or any thing else is not relevant to me personally. Oh and then news as well. I don’t even watch it or read it.

I am a firm believer in this quote…“As to the methods there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble.”

When one has a firm grasp on the principles of their market the method by which it is traded is a matter of choice I suppose. You and I both bear this out in this conversation it seems.

Volume is relative to you but not to me. Supply and Demand is very relevant to me and not to you. To me and I think you did agree the two, SD are not the same as volume.

I will have to suggest to you that DOM is more relevant than you may be aware though. Maybe not in the conventional since as some use it to trade but regarding real orders to buy and to sell and how deep those orders are does matter because this is where the imbalances occur that turn the markets. Ironically it is the lack of opposing orders that turns the markets.

thanks for the discussion dude

Hey James,

thanks to you too, it is good to have a dialogue rather than one of those troll-brawls you see on forums sometimes ;))

The Depth of Market topic is very interesting, and it would merit an entire thread of its own, probably…

I don’t believe that the primary driver in the major financial markets is supply and demand. I believe it is Institutional Order Flow. Although the difference is subtle, S/D implies a degree of randomness in price. All over a chart, are orders that we cannot see, that the Institutions are looking to fill. These unseen orders (Stop Losses and Limit Entries) provide the liquidity for Institutions to move the markets. Because these institutions move the markets with such force, they bring price back to ‘imbalance areas’ to fill more orders, and then manipulate price to create profit. When price returns to these areas, it often happens so fast and hard (sorry to excite anyone) that it makes getting into the market in the same direction as the Institutions a scary thing to do.

In reality, it’s creating profit for the market makers to by allowing them to put more positions on as close to the original cost as they can, and then bring price back to that point to get more orders in place. This is not a pure market the way we’re led to believe, and I’m glad for that. In my mind supply and demand means that no one is really certain where price is going to go in the future. That is not the case, and the precision every single day that one can predict moves with, attests to that.

I certainly respect people with the ability to make money by watching moving averages cross, but it seems so much more direct and ‘easy’ to understand price action.

hi Hogarste,
yea that phrase supply and demand has been tossed around so much and there are all sorts of perceptions as to what it is. Myself though, i believe that the institutional order flow is the supply and demand. IMO when an institution places an order to sell a large quantity this is the supply. Likewise when an institution places a large order to buy this is the demand. Also, it should be noted the institutions do not own the exchanges and probably could care less about stops and what have you. The exchanges are largely electronic now anyway but the exchanges get paid by filling these institutional orders. Fact they get paid both ways. The institutions orders are fed us retail traders by the exchanges in reality. As discussed in posts above myself and others believe that there is also some confusion over supply and demand and “volume”. LOL

It almost seems you are confusing the institutions with the exchanges. They are not the same. As far as manipulation it does seem like manipulation and i suppose to and extent it could be but if you think about it the exchanges get paid to fill orders. Institutional orders are the biggest of course. Call it manipulation if you will but price is sooner or later going to those orders to buy and sell mass quantities. Its really just the natural order of things but with an order of sufficient quantity an institution can bring a market to themselves. But really, is that manipulation?

I think the biggest misnomer is the phrase Supply and Demand itself. Regarding SD and trading it has been so twisted and confused its crazy. Supply and Demand is a very basic economic principal regarding availability of any commodity. Since we cant legally see any orders in any markets then measured quantities is not helpful to us. Its the movement in price away from a particular area that interests traders really. There are multiple opinions but im in the camp that volume doesn’t matter as part of the equation either. But that’s just me. However you and i may differ on this point though and that is getting in the market in the direction of the institution. IMO if you are not entering in the markets in the same direction as an institution at a particular price zone then your trades will be very short lived.

There are thousands and thousands of traders that will tell you that understanding price action or at the least the principles of price action and supply and demand this in no way makes trading easy. Not by any stretch of the imagination. The reason why it is so difficult is because of the very problem you mentioned. No one can see the orders. If we could see the orders we wouldn’t need these charts. LOL So even with a superior grasp of supply and demand principles and price action along with a firm grasp on the function of the exchanges and our brokers trading is still not easy. I can show you supply and demand all over any chart. Its not hard to see. The problem comes in market depth. We have zero way of knowing how deep the orders are. It is actually against all sorts of rules and laws for you to know this information. Its a violation of federal laws for anyone to even tell you about these orders. So the picture of supply and demand imbalances as seen in simple price action is really all we have to go on and even then it is still a hope and a gamble that there are still sufficient unfilled orders at the level one is interested in to push price in your direction far enough to hit your target.

LOL i do this every day. Anyone that tells you doing this is easy, they don’t do this. Understanding the relevant principles is easy. Trading from the retail side, that is never easy. Not impossible but definitely not easy. Heck now even retailers can hide their orders. My platform offers “iceberg” orders even. LOL

One more note then im done. I often see commentary giving folks a difficult time over their indicators and oscillators etc. Well the truth of the matter is that all data on the charts is historical. Candles and all. The real information you need is not on a chart. But, the charts are all we have. But you have to imagine yourself as in your car driving down the road backwards and with no mirrors even. All you are allowed to see is whats out your wind screen which you now driving backwards. Thats what is happening on a chart. Everything you really need most is way off to the right and not yet on a chart. LOL As soon as data hits that chart, its historical.
Thats not to say its of no use because charts are helpful. LOL especially since its pretty much all the data we are allowed to have regarding price.

Anyway, thanks for the discussion.

Screenshot by Lightshot
on this day way more buy orders on the books than sell orders. Price went down all day long.
Screenshot by Lightshot
notice in the DOM grid on the left at price 2092 the comparatively large quantity of sell orders. Notice on bottom of grid collectively more than twice the sell orders. Not even enough buy orders to move price up to 2092. But guess what? that is exactly where price went.
Screenshot by Lightshot
this just shows on the chart price went exactly to 2092 and thats as far as it got untill for a while.
My point here being that price moved up to where the biggest pile of orders were at. Once there were no more willing buy orders at that level price then moved down.

Some will call that manipulation. But is it really? If it was any of your job fill orders. Would you nickel and dime your self to death or move over to that big pile and start ringing the register. Thats just the facts of life. Thats how things work.

This is a rare opportunity for me to try and show this. I hope i did good enough job for you to see.

thanks

Nice exp…and on the long bullish candles, the breakout, etc, you’re right on the fading volume part…

I think Supply and Demand will determine the movement of the market because more demand will lower up the price and less demand will make higher price. And usually, you could use chart which contains Support and Resistance range as your limitation for price movement. If the price could break Support range then there is high possibility if the price will move in strong bearish and vice versa, if the price is breaking Resistance then it will be strong bullish. For me, Supply and Demand are similiar with Support and Resistance.

@bearish you are pretty close. SD in itself cant move price. What does move price is actually a SD imbalance. its the lack of one or the other. What i was trying to illustrate above is the phenomenon where a particular market actually falls with multiple times the buy offers than the sells.

regarding your idea of breaking support and a market turning strongly bearish. Well yes and no. Really when a market breaks a strong support you typically will see a pullback to the origin of the imbalance that pushed price lower. its easy to see on practically any chart. Its the basic identifying trait of a trend. Lower lows and lower highs. So yes and no. LOL

One more thing, without SD there would be no support or resistance.