Markets move, whether forex or other, when there is an imbalance between supply and demand. In these cases, a market will move until it reaches a level that draws in buying or selling to restore the balance. Markets are in a never ending quest to find equilibrium between supply and demand.
This is an important concept to understand as it is not technical analysis that drives the
market but it can fuel a move as it attracts buying or selling that adds to the imbalance.
This can be seen across all time frames with the longer ones most widely watched and
therefore having the greatest impact on the supply and demand balance when a
technical level holds or is breached.
So, the question should be:
How to use this to your advantage. First, recognizing that it is
a supply-demand imbalance that is driving a market move allows you to put the price
action in perspective by looking at a chart and picking out what levels technical traders
are looking at. This, in turn, allows you to try and predict market behaviour if a level holds
or is taken out as this will add to (e.g. if stops are triggered) or reduce (e.g. if a level
holds and draws in buyers or sellers) the supply-demand imbalance.
Of course there is more to it as retracements should be treated differently than moves
with a trend. Key levels, which we define as those that will trigger a market move if
broken or hold, have to be identified. In addition, levels need to be identified that would
change the trend if broken or strengthen.
Whatever the case, price action needs to be viewed in the context of a supply-demand
imbalance as that is what drives market moves. The ability to pick out levels that matter
can help you predict market behaviour and the price action. This can also help you
decide when to trade as the best risk-reward odds are often when you recognize a
supply-demand imbalance and take advantage of it to predict market behaviour.
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