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What is supply zone in forex?

Supply zone in forex is a term used to describe an area on a price chart where the supply of sellers exceeds the demand of buyers. This is often a key level for traders as it represents an area where prices have previously struggled to rise above, or where they have met significant resistance. Understanding supply zones can be critical for traders who are looking to make informed trading decisions based on technical analysis.

A supply zone can be identified on a price chart by looking for an area where prices have previously struggled to move higher, and where there are multiple price points that have been rejected. These areas can be found on any timeframe, from the shortest-term intra-day charts to weekly and monthly charts. The more times an area has been tested, the stronger the supply zone is likely to be.

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There are several factors that can contribute to the formation of a supply zone. One of the most common causes is a large number of sellers entering the market and selling off their positions at a particular price point. This can occur for a variety of reasons, such as a change in market sentiment, negative news, or a shift in economic fundamentals.

Another factor that can contribute to the formation of a supply zone is the presence of key technical levels that traders are watching. For example, traders may be looking to sell at a particular price point based on a trendline or moving average, or they may be looking to exit their long positions at a key resistance level.

Once a supply zone has been identified, it can be used in a variety of ways by traders. One common technique is to use the supply zone as a level to sell short, with the expectation that prices will be unable to move higher. Traders may also use a supply zone as a target for profit-taking on long positions, or as a level to place stop-loss orders to limit potential losses.

It is important to note that supply zones are not always fixed and can shift over time as market conditions change. For example, a supply zone that was previously strong may become weaker if buyers begin to enter the market and push prices higher. Conversely, a weak supply zone may become stronger if sellers continue to enter the market and push prices lower.

Supply zones can be used in conjunction with other technical analysis tools to help traders make informed trading decisions. For example, traders may look for confirmation of a supply zone by analyzing volume or other indicators to see if there is a high level of selling pressure at that level. They may also look for other technical signals such as candlestick patterns or chart formations that suggest a reversal is likely to occur.

In conclusion, understanding supply zones is an important part of technical analysis in forex trading. These areas represent a key level where the supply of sellers exceeds the demand of buyers, and can be used in a variety of ways by traders to make informed trading decisions. By identifying and analyzing supply zones, traders can gain a better understanding of the market and improve their chances of success in the long run.

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