Ask yourself where the asset prices we see in the market come from. Why do prices sometimes spike rapidly? Why do they sometimes drop so sharply?

The answer is supply and demand, which are the fundamental principles driving all markets. Whether it's stocks, energy, gold, or even digital assets.

But this isn't as simple as it sounds. The law of supply and demand states how everything in the market is determined. Let's see how it works.

Starting with demand. It is the desire to buy goods or services at various price levels. If prices go down, people want to buy more because items are cheaper. But if prices go up, demand decreases. Pretty straightforward, right?

Supply, on the other hand, is the willingness of sellers to sell. It is the opposite of demand. When prices are high, sellers are willing to sell more. But if prices are low, they will reduce the quantity offered.

This is the key point. The law of supply and demand states that the actual market price occurs at the equilibrium point where the demand and supply curves intersect. At this point, the quantity buyers want to buy matches the quantity sellers want to sell.

Anything that changes causes the price to shift. For example, recently, the Strait of Hormuz was closed due to conflict in the Middle East, causing about 20% of the world's crude oil to disappear from the market. This is a strong supply shock. Meanwhile, energy demand remains the same. The result? Oil prices surged because of a shortage.

How is this useful for investing? If we understand how supply and demand work, we can better predict prices.

For fundamental analysis, when stock prices fall, it indicates strong selling pressure. When prices rise, it shows strong buying interest, driven by expectations of earnings, company growth, or macroeconomic factors.

For technical analysis, traders use tools like candlestick patterns, support and resistance levels, or trend lines to identify when supply and demand are shifting.

A popular technique is the Demand Supply Zone, which looks for points where price is out of balance, predicting that the price will oscillate to find a new equilibrium. For example, the Demand Zone Drop Base Rally (DBR) occurs after strong selling causes prices to plunge, then pause, and when buying resumes, prices rally again.

Understanding how supply and demand rules work isn't difficult if you actually apply it. Observe real market prices, study factors affecting demand—such as investor confidence, central bank policies, liquidity—and factors affecting supply—like corporate policies, new listings, regulations.

Once you see how these factors influence prices, your investment decisions will become more principled, and you'll rely less on luck or rumors.