In Forex trading traders use Technical Analysis to measure supply and demand. Technical Analysis is derived from mathematical formulas that analyze overall changes in price.
For the most part, traders will use Technical Analysis to measure whether a Forex pair is undervalued, overvalued, or whether its momentum is building which could cause a sharp change in prices.
Some of the key indicators and chart patterns Forex traders use:
Trend lines: There are two types of trends; up trends and downtrends. An uptrend occurs when a Forex pair is moving high and also trades at higher highs as it rises. This is an indication that buyers are becoming more aggressive. A downtrend occurs when a Forex pair moves trades at lower lows as its price falls. Learn More about Trend lines.
Support/Resistance: Support is a level of buying demand, while resistance is an area of selling pressure. For example, if one looks at a chart and sees that on every drop of the EURUSD to 1.3000 it quickly jumps to 1.3100, this will indicate that there is buying demand at the 1.3000 level that is supporting prices. Learn More about Support & Resistance.
Moving Averages: Moving averages are calculated by taking the average price over a series of time. For example, a 50 period moving average, calculates the average price over the last 50 periods of a Forex instrument. Forex traders use moving averages for possible support/resistance levels in the market.
Bollinger Bands: Bollinger bands measure the standard deviation of a moving average. It is used to determine when Forex instruments are overbought or oversold. Depending on the strategy, Forex traders will often buy when current prices trade below the lower Bollinger Band and sell when prices rise above the upper Bollinger Band.
Relative Strength Index (RSI): RSI measures a trading instrument's recent gains versus losses over a given period of time. A rising number indicates upside momentum is increasing.