Auctions are a great way to get a particular item for a great price. It can also teach us many lessons as traders such as trading supply and demand zones, how to identify supply and demand zones on a chart, supply and demand trading methods, and lastly high probability day trading with supply & demand. What if I told you that everything that goes on in a car auction can be exactly what is going on in your trading charts?
It is important to understand that there is something going on behind the scenes that are making the market move.
Hopefully, by reading this article, you will get a great concept of what supply and demand is, and how you can profit in such in an unpredictable environment.
Let's look at the basic definitions of supply and demand before we get started and why auctions can teach every trader valuable lessons.
Supply is the amount of a distinct product or item a seller wants to sell at a particular price.
While demand is an amount of a distinct product or item a buyer wants to buy at a particular price.
And so the price is going to move with changes in the supply and/or demand.
There always has to be a seller and there always has to be a buyer for this to work. However much the consumers wish to buy vs. the quantity of the item a producer wishes to sell is what makes supply and demand work. Also, read about the Forex Mentors and the best investment you can make.
Whether you have seen it live or not, most of us know the basic concept of what an auction is. It can be an auction for cars, housing, watercraft, school district equipment, sporting equipment, and so on...
Let's use a car auction for a clear example of supply and demand:
So in this scenario, we have or fixed supply, one vehicle for sale.
There is much demand for this particular car. We have many different potential buys for our car. So there is a huge crowd eagerly awaiting the start of the bid.
But before this starts off remember that every single one of these potential buyers is all willing to buy this car at different prices. Some have their limit from $60,000 to $80,000. While others maybe have higher limits.
So the car opens for a set price of $50,000.
What happens next is the bidders are now all competing with each other at increasing prices, hoping to be the last one standing at the end of the bidding.
Initially, the price is going to shoot up rapidly: $55,000, $60,000 and now it's soon up to $72,500 in a matter of seconds.
As each bidder hits his maximum price, they will soon drop out because they are not willing to spend any more than their max price.
Now when this is happening the rate of the price will slow down and the bidders who are still willing to get it will take more time to consider making another bid.
If there is exceeding emotion, some bidders may even go over their pre-planned maximum bid because they are desperate that they will come out victorious and get the car of their dreams.
Eventually, there will be no bidders left, and the car is sold.
So what does this whole scenario have to do with the price action on your charts?
Well, think of the market as a dual auction process. The price is auctioning both up and down depending on which of the two forces is dominant at the time (demand or supply)
That is how it works in the Market...
-Price rises while demand is greater than supply.
-Price rises until it runs out of buyers.
-Price falls while the supply is greater than demand.
-Price falls until it runs out of sellers.
So basically what you see on your charts is the supply and demand imbalance that is created by a trader's sense of urgency to do a transaction.
There is a battle going on inside every single candle on your charts and someone is a winner and someone is a loser.
It's all about the people and the decisions that they are making about the market direction.
So next time you are checking out your charts, remember this important lesson we can learn from a car auction. The more buyers and more interest there is the price will jump up rapidly. But when it slows down and there is not much interest left or no buyers left, the market will move down because the sellers will take over.
Thanks for reading! We hope this helps you understand a little bit more about this topic. If you are looking for a great strategy be sure to check out our latest strategy we posted that is called the breakout triangle strategy.
Stay tuned for articles and training that teach you how to draw supply and demand zones in forex, supply and demand trading books, forex supply and demand strategies, understanding the stock market for beginners, how to invest in the stock market with little money, and lastly supply and demand trading methods. We look forward to hearing from you!
Thank you for reading!
Please leave a comment below if you have any questions about Supply and Demand Trading!
Also, please give this strategy a 5 star if you enjoyed it!
-Trading Strategy Guides