If you had to make a choice between stock, commodities, forex, and crypto markets, which ones would you say are affected by supply and demand more often than not? Contrary to common belief, forex is actually the only one that does not yield to the impact of the relationship between supply and demand among all four markets. Although the two terms are tightly connected to the subject of price, forex is exempt from such rules regardless of perceived relatedness.
Naturally, one may wonder why we should still learn about supply and demand despite the fact that forex is not susceptible to this type of market push-and-pull motion of prices. Also, can the skills we obtain through doing trading in the forex market be further utilized in trading in the other three markets and vice versa? We are going to discuss here how such inter-market support and information exchange can prove to be quite profitable down the road, what some substantial points of divergence between different markets are, and how the law of supply and demand affects money-making.
Building a Foundation of Financial Literacy
First of all, to be able to take part in the forex market, each trader must build on financial literacy. To trade money, one needs to comprehend the language of money, which implies the understanding of basic terms, trends, and laws of finance. While people who do not possess this knowledge may exist, such an approach should not be your goal or rule to live and work by. We can admit that we do not know a particular field or that committing to behaving in a specific way is not one’s forte, but the lack of feeling the urge to develop one’s skills and pool of information probably reflects the person’s mindset, rather than being an individual trait. Therefore, as financial literacy certainly isn’t an imperative, if you desire to become a professional forex trader, wouldn’t you want to do everything in your power to secure this future affluence?
Once you become really good at trading forex, you have naturally absorbed the knowledge and skills which can help you grow further and, if you feel the need, you have the chance to expand to other markets as well. Trading currencies can teach you the universal language of trading and thus help you apply this system to any other market of choice. The very necessary analysis and risk management skills used in forex can protect you and allow you to multiply your profit through expansion. If you have a stable foundation, you can allow yourself to think big and start acquiring other necessary pieces of information that such a transition could require. As expected, although general principles of trading are vital for shifting from trading in one market to trading in another, copy-paste mentality will not work. Regardless of one’s trading expertise, every individual should invest in growing context- and market-specific knowledge in order to be able to generate capital and make a profit.
The ability to trade in several markets, spreading your know-how from forex into other markets, puts you in a desirable position. At this stage, people will not only look up to you as a successful forex trader, but they will also be interested in trading any other commodity (such as grains, oil, etc.) or stocks. The possibilities are countless in this scenario because you are perceived as marketable. Nonetheless, if you are not eager to make this move, do not push yourself into undergoing this transition. Despite a degree of accompanying convenience, incentives, and benefits, spreading out should be a conscious choice, not a decision made just because.
The Importance of Diversification
Another important side of trading includes diversification – we do not only need to focus on shifting to other markets here. Diversification should be a constant approach in your trading, which pushes you to make career decisions that would support you in your search for additional sources of profit. Not only is this a good decision from the financial point of view, but it is also very smart to adopt as much knowledge about other markets as possible (e.g. cryptocurrency) due to the nature of trade. One day, hypothetically speaking, currencies as we know could disappear and knowledge of other currencies, for example, could not only alleviate the incurred challenges but help you prosper as well. We may not be able to control global events, yet we can adopt such a mindset to both prevent any possible losses and build a sustainable money flow.
Having an array of strategies to earn money at your disposal secures financial gains regardless of external factors. If you are successful at forex trading alone, you are already safe despite market trends, sudden highs and lows, or even recession. Nonetheless, no matter how dexterous a trader you may be, a time may come when a local change in laws and regulations affects this market or forex loses its significance globally, so you should consider different ways to fortify your foothold.
Devising such a clever plan always implies exploring several options and building on knowledge, as we discussed above. Even history has shown how a number of stock traders who turned to forex initially failed precisely because they resorted to the same strategies they had previously used to trade stocks. These early-on attempts to incorporate supply and demand, some old indicators, the highs and lows of the market, etc. only made them quit, thinking that forex is unsafe, unpredictable market with no future whatsoever. Even if you wanted to apply forex strategies in the stock market, for example, you would not be able to succeed without making certain adjustments. Therefore, we need to truly invest in understanding the differences and why our long-term plan could suffer unless we alter a particular approach which bore fruits in some other setting before.
In the context of supply and demand, we always have a similar situation whether we are talking from the perspective of a manufacturer, instructor, or consumer. Let’s assume that an individual possesses all of the aluminum there is on the planet, so they could always tap into this supply and trade it for whatever price they desired. As we know that aluminum can be used in a number of industries (e.g. automobile, construction, etc.), this individual would always enjoy considerable demand because everyone needing this commodity would turn to them regardless of the price.
However, if another person happened to discover a fresh supply of aluminum, the first individual would not be able to dictate the price as they used to. While the demand for aluminum did not change in this scenario, the supply did. Hence, the other person could set a lower price and therefore take over a significant portion of demand. As time goes by, someone could discover a substitute for this element, which could be used in the automotive industry instead and thus substantially influence the demand. Although this was an invented story, this rule of supply and demand always determines the price in the real world all around the globe.
Remember, Availability Always Drives Price
If we only have a limited number of items for one product, this product will always be in high demand because everyone wants or needs to have it. Moreover, its price will always be high because every manufacturer would want to use this opportunity to earn a profit. Therefore, low supply and high demand always imply high prices. Conversely, with high supply and regular demand, manufacturers cannot charge a high price for such products. In the context of the markets we trade, this phenomenon is closely related to the notion of intrinsic value. If we take all factors surrounding the stock or commodity we want to trade into considerations, everything boils down to what we believe their value is.
Quite interestingly, although markets heavily operate based on this notion, we do not need to know the intrinsic value of a product to be able to effectively trade it. The forex market, therefore, does not depend on this value especially because fiat currencies stopped being tied to the value of gold. The fact that currencies do not have intrinsic value does not imply that they have no value at all, quite the contrary, but they are not connected to anything that has real worth.
Where do supply and demand come into play when we are talking about the stock, commodities, forex, and crypto markets? When we think of the stock market, we naturally think about the worth of assets, people, information, and technology, among others, which naturally fluctuates. With the commodities market, we know that the supply is limited, while the demand can oscillate both up and down. Although involving the notion of currency, the crypto market heavily relies on supply and demand as well. As we stated before, unlike these three markets, supply and demand have no power in the world of forex trading. While there is a great number of people who propose otherwise, turning to disreputable, untrustworthy, and ill-advising sources on one hand or replicating actions and methods used in the stock market on the other can have severe consequences.
Of course, thinking about the supply, we can discuss the impact of quantitative easing and the cases when the government prints more money; however, in reality, we cannot truly predict how this affects the price. Many times we may assume that the price would go down when, in fact, it goes the opposite direction. We can, however, acknowledge the relevance of demand to forex trading. This market often witnesses a unique phenomenon where, if there is too much focus on one currency, big banks enter the picture to push the price down. Nonetheless, the relationship between supply and demand is nonexistent, which is why it does not apply in this market.
Learning from the Past
If a trader does not learn how to see past the differences between markets, they will never achieve the rewards which such knowledge bears. The understanding that the forex market is completely different from other markets must come first, and the awareness concerning supply and demand also belongs here. Likewise, the phenomenon of overbought and oversold, which is directly connected to supply and demand, simply does not apply to spot forex. Unlike other markets, currency pairs act differently to any other commodity or stock, and big banks may move prices in any direction they want.
The only other outside factor which can affect currencies is the government stepping in when a currency is officially too low or too high. However, such interventions are not predictable or regular for that matter. What is more, we cannot create a strategy based on their impact because predicting the change they are going to bring about in advance, or the market’s reaction to them is simply not possible. This entire setting with all of the key factors and players is what undeniably separates forex from any other trading market. These are in fact such essential pieces of information that are inextricably related to one’s likelihood of succeeding in forex trading.
Turning to the markets of intrinsic value, we must apply the same rule put forward for the forex market – we cannot use the same approach. The tools and values used in forex trading cannot be blindly transferred to other markets without previously making any adjustments to those markets’ needs and structures. Of course, we can always acknowledge the existence of some similarities, but to be able to draw any significant conclusions, we must address the basic discrepancies between the stock, commodities, forex, and crypto markets. Nevertheless, this should not stop you from putting some extra effort into becoming an expert trader across several markets. While this expansion might take some more time, diversifying could open up a world of new and exciting opportunities.
Of course, the topic of supply and demand, as well as the notion of intrinsic value, is vital for any long-term success in markets we trade. Most importantly, these markets’ core values and differences are so abundantly clear and straightforward that the knowledge you gather should directly help you go beyond the forex market and secure a substantial profit as a result.