I just realized that the law of supply and demand remains the fundamental mechanism driving the prices of all assets, whether stocks, gold, energy, or even digital assets. It’s very easy to misunderstand because what exactly is supply and demand? Essentially, it’s the buying and selling interests that are related in an interesting way.

Starting with the demand side, which is the desire to buy goods at various prices. When plotted, it shows us the demand curve that indicates how much buyers want to purchase at each price level. The basic rule of demand is an inverse relationship: if the price rises, the quantity demanded decreases, and vice versa. Why is this? Because two factors are at work: income effects, where a lower price increases the purchasing power of our money, and substitution effects, where cheaper goods become more attractive options compared to other products.

As for supply, it is the willingness to sell, which works opposite to demand. When prices go up, sellers want to sell more because profits are better. When prices fall, sellers reduce the quantity they sell. Equilibrium occurs at the point where the demand and supply curves intersect. At this point, price and quantity tend to stabilize because if the price is above equilibrium, inventories build up, pushing prices down; if below, shortages occur, pushing prices up.

A clear example right now is the oil situation. Since March, the Strait of Hormuz has been closed due to tensions in the Middle East, causing about 20% of the world’s crude oil supply passing through this point to suddenly disappear. Meanwhile, energy demand remains steady, resulting in a supply shock. Oil prices surged rapidly.

In financial markets, demand and supply are the fundamental forces driving stock and other asset prices. Factors affecting demand include market liquidity, interest rates, and investor confidence. When interest rates are low, investors tend to seek higher returns in the stock market, increasing demand. Factors influencing supply include corporate capital raising policies, new IPOs, and financial regulations.

When it comes to trading, demand and supply are what traders use to read candlesticks. A green candlestick indicates strong demand, with prices holding at higher levels. A red candlestick shows strong supply, with prices possibly continuing to decline. A doji indicates a balance between buyers and sellers, with no clear direction yet.

The popular Demand Supply Zone technique involves looking for moments when the price loses balance, such as a rapid rally followed by a pause in a base before rallying again—indicating a bullish continuation. Conversely, a sharp drop followed by a base and further decline suggests a bearish continuation. Traders can enter trades at breakout points of these consolidation zones.

Understanding demand and supply fundamentally means understanding what drives price movements, whether through fundamental or technical analysis. This principle remains the same; it requires practice and real market observation to see the full picture. If you can predict demand and supply, you can also forecast price movements.