Forex Supply and Demand: 5 Key Factors You Need to Know

The foreign exchange, or Forex, market is where the world's currencies are traded among banks, other financial institutions and individual investors. The interplay between the supply and demand of individual currencies is one of the most influential factors in determining changes in currency prices. The factors that affect supply and demand in the market are many and include macro-economic factors and current events.

The Forex market is complex enough to the extent that inexperienced investors who remain unaided by an automated trading robot package are advised to stay away from serious trading. However, if you are considering trying your hand at Forex trading using the latest robots to assist you, it is important to have a basic understanding of how supply and demand operate within this fascinating and potentially lucrative market.

Here are 5 key factors of Forex supply and demand you need to know:

1. Currency prices fluctuate because there is more or less demand for it

Economics 101 teaches us about the law of supply and demand. This law applies to the currency markets as much as it applies to the price of commodities like pork bellies, grain or oil. The law applies to the currency market as follows: the price for a given currency will rise when there is more demand for it and it will fall when there is less demand. The demand for a given currency might increase, for example, if recent press indicates that the economy to which the currency is tied is doing well, while it might decrease if its central bank lowers interest rates.

2. Prices are also greatly affected by the amount of supply of a particular currency

Back to Economics 101: another aspect of this principle states that if the supply of a given commodity (or currency) increases, its value (and therefore prices) decrease.

And, while the supply side affecting currency pricing is important, the demand side is where you should mainly focus when looking for indicators into price changes.

3. Many factors influence currency supply and demand

Just understanding the law of supply and demand is not enough, of course, to predict price movements for a given currency. Rather, a number of factors must be considered when trying to determine where prices are headed. These can include everything from changes to the political situation of a country, to military-related events - and even changes in the weather.

4. The time factor is an important consideration for Forex trades

If you are considering trading in the Forex market, you need to consider both short-term and long-term realities. In the Forex market, long-term supply and demand relates to a period of one or more years, where short-term refers to a month or less. Both short-term and long-term trends need to be taken into account when looking at trading decisions. For example, the pricing trend for a given currency might be on the rise in the short-term but on the decline in the long-term.

5. A grounding in economic factors helps, but using trade indicators is the smartest approach

Understanding the basic macro-economic principle of supply and demand yields necessary and important insights into how the Forex trading market works. However, technical factors can also affect supply and demand. The key is to remain focused on the factors that affect demand. And, using a mechanical entry and exit system that leverages trade indicators is the smartest way to eliminate the distractions that can creep into the decision process.