Financial markets are like a constant tug-of-war between demand and supply. Whether it's stock prices, oil, gold, or even crypto, everything is driven by this force.

I saw this clearly when oil prices surged after the Strait of Hormuz was closed. Demand remained the same, but supply dropped by 20% instantly. The result was a price spike beyond the ceiling.

However, demand and supply are not just about high or low numbers. They are much more complex. Let’s try to understand this better.

Starting with demand: The desire to buy isn’t solely dependent on price. When prices fall, people tend to want to buy more because they have more money (income effect) and because the item looks cheaper compared to other goods (substitution effect). But demand also depends on many other factors, such as buyers’ income, future outlook, investor confidence, or unexpected news like wars or crises.

In financial markets, demand depends on macro factors like interest rates, economic growth, and financial system liquidity. When interest rates are low, investors seek higher returns in the stock market. Supply, on the other hand, has its own factors, such as company policies, capital increases, share buybacks, or the listing of new companies.

I think it’s important to note that demand changes based on market sentiment and information, not just fundamentals. Good news can boost demand and push prices higher; bad news can cause people to sell.

When demand and supply meet at the equilibrium point, that’s the actual market price. Prices are not static; they fluctuate. If prices rise above equilibrium, sellers want to sell more, while buyers hold back, leading to excess supply and a price correction downward. Conversely, if prices fall below equilibrium, buyers want to buy more, and sellers hold back, causing a shortage and prices to rise.

My analysis of demand and supply used in trading is called the Demand Supply Zone, which helps identify moments when prices start to lose balance and are likely to oscillate toward a new equilibrium. When prices rally or drop sharply, it indicates excess demand or supply. Then, prices pause briefly to allow these forces to collide.

A simple example is the Demand Zone Drop Base Rally (DBR). Prices drop sharply due to excess supply, but when they reach a low point, buyers see an opportunity, causing prices to oscillate within a range (base). When good news comes out, demand strengthens, breaking through the upper range and rallying further—that’s my entry point.

Conversely, the Supply Zone Rally Base Drop (RBD) begins with a strong price increase driven by demand. When prices rise, sellers see an opportunity and start selling, causing prices to pause within a range. Bad news then causes supply to strengthen, breaking below the lower range and dropping sharply.

From years of trading, I’ve learned that demand and supply are the best tools for predicting prices—whether for fundamental analysis, to assess if a company has strong buyer interest, or for technical analysis, to observe buying and selling momentum at different times.

Most importantly, you must understand that demand and supply do not just tell you a single price point. They are part of an ongoing process. Prices oscillate, and within each oscillation, traders who understand these principles can identify opportunities and profit from them.