Supply and Demand in Forex Trading Explained for Dummies*

What are supply and demand?

Supply refers to the amount of an asset, commodity, currency, service, or product that is available to be used, acquired, or bought while demand is the quantity of a product, asset, commodity, currency, or service that people and entities are willing to purchase or acquire.

Simply put, demand indicates how many buyers there are in a particular market and how much they are prepared to buy a specific item. Supply is how many sellers there are in a given market and how much they are willing to sell a specific item.

What is the law of supply and demand?

The law of supply and demand is a key concept in microeconomics.

The law states that if the supply of an item is high and the demand is low, a surplus of the item is generated which pushes the price down. Contrarily, if the supply of an item is low and the demand is high, a shortage develops, pushing the price higher.

The law can be summarised as follows:

The law of supply and demand can be applied to any item that can be traded (bought and sold) as well as to any financial market, such as the forex market (currency market).

What is forex trading?

The word forex is an abbreviation of the term foreign exchange and FX is an abbreviation of forex. Hence, foreign exchange, forex, and FX, all refer to the same thing.

Forex (foreign exchange or FX) trading is the trading of one currency for another. For instance, euros are traded (exchanged) for ZARs (South African rands).

Forex trading takes place on the foreign exchange market, also referred to as the forex market.

The forex market determines the value, also called the exchange rate, of the majority of currencies.

The exchange rate is the value of the currency of one country or economic zone versus the currency of another country or economic zone, such as the European Union. For instance, as of December 6, 2025, it takes R17.98 to buy one euro and a person has to fork out R15.94 for one US dollar.

Supply and demand in forex

The main factors for determining exchange rates (value or price of currencies) are the supply and demand for foreign currencies in the forex market.

Exchange rates are inversely related to supply and demand. For example, when demand for a country’s currency is high, prices rise, and the value of the currency appreciates.

Conversely, when a country’s imports exceed its exports, there is relatively less demand for its currency, causing the currency to lose value.

Put differently, if the demand for a currency pair is low and the supply is high, it will push prices lower. Conversely, if the demand for a currency pair is high, and the supply is low, this will affect prices to increase.

Forex traders apply the law of supply and demand in their forex trading, focusing on supply and demand for a specific currency at a certain point in time to determine whether the currency’s price will increase or drop.

Factors that determine the supply and demand for foreign currencies

There are numerous economic and political factors that can affect the supply and demand for foreign currencies. Factors such as:

• Economic changes in a country that change (positively or negatively) the relative economic strength of the country. (This is a major factor.)

• The debt of a government may cause concerns that it may default on its debt, causing investors to withdraw their investments and take them to other countries.

• Interest rates can also cause foreign investors to reduce their investments in a country. This happens when interest rates are adjusted downwards. Investors may take their investments to other countries with more favourable interest rates, receiving higher returns.

• A country’s Inflation rate affects the value of its currency. Typically, a country with a low inflation rate experiences an increase in the value of its currency. Conversely, countries with higher inflation experience depreciation in their currencies.

• High unemployment figures will affect the value of a country’s currency. A high unemployment rate restricts a country’s competitiveness and productivity, decreasing the demand for exports, which will probably weaken the currency of the particular country.

• Other economic factors that can affect the value of a country’s currency are:

Gross domestic product (GDP).

Terms of trade (a ratio that compares imports with exports).

• Political factors are also determinants of the value of a country’s currency.

For example, unpopular laws and policies of a government can cause unrest and uproar, making the rest of the world uncomfortable and anxious. Foreign countries may take steps to ‘punish’ the particular country, probably resulting in a drastically decrease of the currency value.

Other factors that can increase the demand for foreign currencies are, amongst others:

• Investments in foreign countries.
• Tourism from abroad.
• Payment of loans and interest to international entities.
• Financial support for family members and friends living abroad.

Supply and demand trading (S&D trading) in forex

The supply and demand of currency pairs are influenced by all the players involved in the forex market.

Players include traders, investors, speculators, governments, central banks of countries, funds, banks, and other big institutional players. The players constantly shift the demand and supply of currency pairs, causing price fluctuations.

Additionally, sentiment among players in the market helps to affect supply and demand. The sentiment is stoked by economic and political factors, as well as the flood of news (good and bad), data, and other developments occurring around the globe.

S&D trading as part of price action trading strategy

Price action, the foundation for technical analysis, is a trading strategy that enables players in financial markets to analyse and evaluate the price performance of, inter alia, a share, commodity, or a currency, over a given period of time, on a price chart.

Applied to forex trading, it is a trading strategy that allows a trader to determine recent and actual price movements of a currency without using technical indicators.

Price action strategy acquires knowledge about price history and uses it to see how the price will react at strong price turning points, or at certain levels of resistance and support.

Whether traders/investors look at strong price turning points, trend lines, or past support and resistance areas, the concept of supply and demand trading (S&D trading) is always at the centre of it.

Supply and demand zones in forex trading

To identify changes in the momentum of price, many traders count on technical indicators and market sentiment.

Conversely, many other traders prefer a price action strategy, trading market imbalances by looking for supply and demand zones. An imbalance is a result of an excess of buy or sell orders for a particular currency pair in the forex market, making it impossible to balance the orders of buyers and sellers.

In forex trading, the supply and demand imbalances can be visually perceived on a tick chart. Ticks are used on a tick chart to indicate the execution of a set number of transactions.

Each tick represents changes in the sentiment of traders toward a particular currency pair. Hence, if traders show a certain bias in favour of a specific currency pair at a certain level, it can be identified on the chart by a knowledgeable trader.

For instance, if a particular currency pair is pushed downwards because of selling pressure, some traders will place their pending buy orders at certain levels below the price. These traders assume that price will not decrease much lower beyond their buy limit order.

The traders place their buy orders at this level with the expectation to purchase the currency pair at this level, assuming that the bearish move is likely to lose momentum.

If a substantial number of traders, or even a big institution such as a central bank, execute this strategy, a big volume of pending orders will be accumulated around this specific level. The implication is that the demand will rise as the currency price reaches this level, probably causing a sharp price increase as price reaches this level, referred to as the demand level.

A similar situation will occur when the price movement is in the opposite direction. When big volumes are accumulated at a certain level above the price, the supply will rise, likely causing the price to fall sharply upon reaching that specific level, called the supply zone.

Traders/investors should be conscious of these two important levels on price charts, where prices are likely to increase (the demand zone) and decrease (the supply zone).

Example of demand and supply zones

(Source: Dot Net Tutorials)

Demand zone explained

The demand zone, also called the accumulation zone, is a price area below the current price action where is a strong buying interest, most likely caused by a large number of buy orders, waiting to be executed at this level. Hence, the zone is a period of sideways price action.

The reason for the pending buy orders is that big players in the market cannot just overwhelm the market with all their buy orders because it would lead to an immediate surge, moving the price up. Hence the big players would not be able to get their buy orders completely filled. So instead, they buy increments of the currency pair within a specified range, causing a demand zone.

A demand zone is formed prior to an uptrend and is the origin of strong bullish trends, which can be explosive upward price moves of currency pairs.

Noteworthy, a demand level is referred to as an area and not as a single line on a chart. It is indicated as a rectangle on a price chart.

Supply zone explained

The supply zone, also known as the distribution zone, is the exact opposite of the demand zone.

A supply zone is located above the price action where there is a strong selling attraction.

The zone typically consists of a relatively big volume of sell orders. When the price reaches this level, the sell orders start to get filled. As in the case of the demand zone, when the big players sell their position, not all their sell orders can be executed, because the selling pressure would drive the price sharply lower, forcing them to sell in a market dive and reducing their profits.

Hence, again the big players sell currencies over a period of time, minimising the market impact on their trades, which creates the supply zone.

A supply zone is formed before a downtrend and is the origin of strong, sometimes explosive, bearish price trends.

As with the demand zone, a supply level is referred to as an area and not as a single line on a chart, indicated as a rectangle on a price chart.

In summary

• Demand and supply zones in forex trading are levels where the price action of a currency pair is likely to make a turnaround.
• These areas can be visually indicated on forex price charts:

A demand level is positioned below the price action, and it is expected to effectuate buying pressure due to pending buy orders in the area.

A supply area is positioned above the price action, and it is expected to effectuate selling pressure due to unfilled sell orders in the zone.

*This article does not intend to provide investment or trading advice regarding forex trading. Its aim is solely informative.