Supply and demandThe tug of war behind every price move.
Every price move comes down to buyers against sellers. Follow one Bank of England decision through cable and you can see why good news never lifts a price forever.
Buyers against sellers
Demand is how many traders want to buy, and how urgently. Supply is how many want to sell. When demand is bigger, buyers have to pay more to get their orders filled, so the price rises. When supply is bigger, sellers have to accept less, so the price falls.
Every trade needs someone on each side. Price keeps moving until it reaches a level where enough buyers and sellers agree, and a chart is simply the record of where that balance sat, candle by candle.
Everything else in this course, from economic data to central bank decisions and headlines, works through this one mechanism. None of it moves price on its own. It changes who wants to buy and who wants to sell, and the balance does the rest.
One decision, followed through cable
Here is how it plays out. The Bank of England is about to announce an interest rate decision, and traders are waiting for it. The decision comes out and the market likes what it hears. Suddenly a lot of traders want British pounds, buying interest surges, and GBP/USD, which traders call cable, starts to climb.
The rising price attracts sellers: traders who bought earlier and now see a chance to take profit. Supply starts to grow. At first the fresh demand is strong enough to absorb them, so the pair keeps rising even while more and more traders sell into it.
Then the pair reaches a level where a growing number of traders think the pound looks overvalued, more expensive than it should be. Buying interest fades. The sellers are left with fewer buyers, and to get their orders filled they have to accept lower prices. The pair turns and drops.
Same news, same day. Nothing about the decision changed between the rise and the fall. What changed was the balance between the traders still wanting to buy and the traders waiting to sell.
Why good news runs out of fuel
News creates demand, but the demand is limited. The traders who wanted to buy because of the decision buy, and then they are in. They do not buy a second time just because the news is still good. Once that buying is used up, nobody new is pushing the price higher.
Meanwhile, every buyer is a future seller. Each trader who bought on the way up will sell at some point to take a profit, and the higher the price goes, the more of them are tempted. A move that started with heavy buying slowly builds up its own selling.
This is why the size of the news tells you less than you might expect about how far a move can run. A decision everyone liked can stall within hours once the buyers are in. The better guide is the balance itself: who is still left to buy, and who is waiting to sell.
Price is buyers against sellers. Always ask which side is running out of fuel.
How far has it run?
A pair that has moved a long way in a short time has used up much of its buying.
Does good news still lift it?
When fresh good news barely moves the price, buyers are getting scarce.
Who is already in?
If most traders already hold the pair, few buyers are left. COT positioning shows how large traders sit.
Reading the balance
The first surge is the news being bought. Watch whether the demand keeps absorbing the profit-taking, or whether the move starts to stall.
Wait for signs that the balance has flipped, such as a push to a new high that fails, rather than selling only because the price looks expensive.
In short
- Price rises when demand outweighs supply and falls when supply outweighs demand. Data, news and central banks only change that balance.
- Good news creates a burst of demand, and the rising price attracts sellers taking profit. Once the buying is used up, sellers have to accept lower prices.
- Before you trade a move, ask who is still left to buy and who is waiting to sell.
Key terms
- Currency pair
- Two currencies quoted against each other, like EUR/USD. Buying the pair means buying the first currency and selling the second.
- Take-profit
- An order that closes your trade at a set price to lock in the gain.
- Central bank
- The institution that sets a country’s key interest rate and controls the money supply, like the Fed, the ECB or the Bank of England.
- Key interest rate
- The rate a central bank sets for lending to banks. It drives borrowing costs across the economy and is one of the biggest drivers of a currency.