Learning to Understand Price Dynamics


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Video Transcript:

Hello, traders. Welcome to the Advanced Technical Analysis Course and the first module,Technical Analysis 101. In this lesson, you will learn all about understanding price dynamic, what makes price move and why does it fluctuate the way it does.

What is price dynamics? Price dynamics are the pricing signals that are created as a result of changing in supply and demand levels in a given market. Any change in supply or demand for a specific asset causes a corresponding change in the other.These changes cause price variations. You already know that for every transaction that is carried out, a counter party is involved in any market. Not only the forex market or the stock market, but any market in the world. If there is a buyer, there must be a seller and vice versa for a transaction to be carried out.

For example, if you want to sell the Euro US Dollar at 1.3001 and the current price is 1.3000, once all the buyers have bought all the orders by the sellers at 1.3000, buyers will have to buy at the next available price which is your price, 1.3001. This means that if there are enough buyers at 1.3000 to overcome all, this means that if there are enough sellers at 1.3000 to overcome all the buying power for all the buying pressure, price will never go up to 1.3001 because the supply will be in control.

In the other case, if the buyers wipe out all the orders at 1.3000, the demand is in control and buyers will go and jump up at the next available price which is 1.3001. If they wipe out all the sell orders there, the price will jump to 1.3002 and so on. So price will have moved up due to these dynamics between buyers and sellers.

Trading Supply and Demand

Now how do you trade and how do you analyze supply and demand zones? Supply and demand zones are zones where buyers and sellers are most likely positioned in the market. Here’s a simple naked chart and you can see here that we have a heavy supply zone because we have a very intense selling pressure right here. Here, we have a demand zone because you can see all the buying that has gone through every time that the sellers try to wipe out all the orders here, the buyers are in control. When this demand gets taken out, we have another small area of demand here. But when this demand gets taken out, you can see that it becomes supply. And when this demand right here gets taken out, it becomes supply.

Now this is what price dynamic or market dynamic is all about. It’s understanding where are the buyers, where are the sellers, who is wiping whom and who is in control. Now to understand this, you need to know how it works in an uptrend and on a downtrend. In an uptrend, demand areas are respected, supply areas are taken out so buyers are in control.

Here’s an example. You can see that here, we have a retracement and here is the demand area. You can see that here is the supply area and the supply area gets taken out while the demand area is respected. Once again, here the demand area is respected and the supply area gets taken out etc. and etc.

Supply and Demand to Trends

On a downtrend, supply areas are being respected, demand areas are taken out so sellers are in control. This is another example. You have here a supply area that is being respected. The demand area is well-positioned here and it gets taken out. Here we have another supply area, another demand area that gets taken out. Here we have another supply area and another demand area that gets taken out.

You can see that price dynamics is very important to understand what we are trying to achieve with this course. This first module, Technical Analysis 101, is the core of all technical analysis and what we are going to be learning in this course. This is why we are going into so much detail for you to understand this simple concepts. Even though they’re simple, they’re kind of complicated because as you already know or as I’ve already shown you, it is not as easy to spot areas of supply and demand on your charts.

Now let’s go to an empty form, so that I can show you live how to spot these areas of supply and demand. Now this is the New Zealand Dollar/US Dollar daily chart. The first thing we’re going to do is we are going to start with the top of the chart. As you can see here, we have a supply zone. Again here we have a couple of stops and these stops have been tested. Again for me, another supply area right here. As you can see and as I already told you on the lesson, this area of supply when it got taken out became an area of demand.

Why is that guys? Well, this is simple. Remember that the area of supply is where the sellers are positioned in the market. It may be true sellers or it may be buyers that are taking profit at these levels because they already know that these are levels of heavy supply. Now when these levels get taken out, the sellers that were here got wiped out and the price started to move up. Because this level was taken out, buyers positioned themselves in this level because they are hoping that price will hold these levels and continue with the uptrend. This is basically why these levels are taking a hold as a demand.

We also have this area of demand right here. Well, if you don’t want to use this level of high right here, I understand because it got taken out and then we went back below it. Let’s just use these highs right here. You can see that we have sellers here, sellers here, sellers here and here until we took them completely out. Of course we can see that we have a very strong demand area right here. We also have a very strong demand zone right here at the bottom of the chart. This is because you can see that we tested this area repeatedly and tested it again. There’s a lot of buyers that are positioned here. Again I’m telling you that they can be true buyers meaning that they are buying the New Zealand Dollar/US Dollar at these levels or they can be sellers that are taking profit at these levels because they know that this area is an area of demand.

There are two types of players that say… When it comes to understand supply and demand, there are the true buyers, people that are positioned there to buy the asset, and there are the sellers that are taking profit. When a seller is taking profit, he’s reducing the selling pressure that has come from all the way up here. Conversely when we arrive to a supply area, there are true players in the market that are positioned here to sell aggressively the New Zealand Dollar/US Dollar or they are just buyers from this area of demand that are taking profit at these levels or at these levels.

You need to be careful. First of all, you need to spot these areas. As you can see here, we are not trending. Because these areas are not being respected, the ranges are huge. The ranges are at 800 pips from this supply to this demand zone because we are in the daily time frame. These are the overall supply and demand zones, but you can clearly see that… It is not clear to see that we are an uptrend because from this point, demand is being respected and supply gets taken out. You can see here the demand got respected, demand disrespected. Here, supply got taken out. Here, supply got taken out. Now this demand is being respected.

We just have to wait and see if this demand is being respected. We have to see if the supply zone gets taken out and we move forward.

If we go to the weekly chart, you can see that… We will top at 8840 and we are right now 8715. We do have some room on the upside. This supply area might be taken out, because you can see that the move to the upside is very aggressive. If you use actually a trend line just to join these lows, you can see that in fact we are in an up market on the overall picture.

Adam

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