Have you ever wondered what actually makes the prices on a Forex chart go up and down? The big secret that all traders must realize is that a Forex chart is a chart of supply and demand (and human psychology/emotion, but we’ll get to that later).
Before we can try to predict Forex movements, we need a short lesson in how supply and demand moves prices.
Think of the Forex market as an online auction site.. Say you wanted to buy something off eBay, let’s call it a “widget.” You go to eBay, type “widget” in the search box, and see that there are 100 widgets for sale, ranging in price from $1 all the way up to $100.
Which one do you buy? The cheapest of course! You place an order for a single $1 widget.
Since the $1 widget has been sold to you when the next widget shopper comes along he finds the cheapest one is $2, but that’s a fair price to him so he buys it. This pattern keeps repeating over and over until the cheapest widget is $50.
After the cheapest widget reaches $50 the buying seems to stop. Through demand the buyers drove the lowest price of widgets up to $50, but it turns out that people aren’t willing to pay more than that, so the demand shrivels up and the widgets just sit there.
What do you think all the widget sellers that really want to unload their merchandise are going to do now? Are they just going to close up shop because people won’t pay $50 for a widget? No, they lower the price of their widgets until buying starts back up again, and the whole process repeats itself.
What has happened is that the demand for widgets drove the price up, then they became too expensive. Then an excess supply of widgets drove the price back down. This is, basically, what moves Forex prices.
Economics is a lot more complex than this (some people study it for 10+ years and get PhD’s in the subject… they must be crazy!), but this one-page example will let us continue learning how to predict Forex movements.