There is an interesting topic regarding what drives the prices of all assets in the market, from stocks, energy, gold, to digital assets.

That is the principle of supply and demand, which is the fundamental gear that drives everything in the financial markets, even amid global tensions and various crises.

Demand is the desire to buy; supply is the desire to sell. This concept is simple but immensely powerful. When prices decrease, people want to buy more. When prices increase, people want to sell more. This results from income effects (people have more leftover money) and substitution effects (comparing with other options).

What’s notable is that demand does not depend solely on price. Other factors include income, tastes, the number of consumers, future price expectations, and even unexpected events like the Iran war, which caused a huge surge in oil demand because transportation routes were closed.

As for supply, it is the willingness of producers and sellers to sell. It has a positive relationship with price. When prices go up, sellers want to sell more; when prices go down, sellers slow down their sales. Factors affecting supply include production costs, technology, tax policies, and even natural disasters.

What truly matters is the equilibrium point, where the demand and supply curves intersect. At this point, price and quantity tend not to change because if prices rise above this point, producers will produce more but consumers will buy less, creating excess inventory that pushes prices back down. Conversely, if prices fall below this point, consumers want more but producers reduce supply, leading to shortages that push prices back up.

In financial markets, factors influencing demand include economic growth, interest rates, system liquidity, and investor confidence. Factors affecting supply include corporate policies, new listings (IPOs), and market regulations.

For stock trading, the principles of supply and demand can be applied in both fundamental and technical analysis. In fundamental analysis, when stock prices fall, it indicates high supply or selling pressure. Conversely, when prices rise, it indicates strong demand or buying pressure.

In technical analysis, traders use tools like candlesticks to observe buying and selling forces at play. Green candlesticks (closing higher than opening) show buying strength; red candlesticks (closing lower than opening) show selling strength; doji (opening and closing at the same price) indicates indecision or equal forces.

A popular technique is the Demand Supply Zone, which looks for moments when price loses balance and tends to oscillate toward a new equilibrium. Prices may surge rapidly or plunge sharply until a pause point is found.

There are two trading styles: reversal trading, such as Demand Zone Drop Base Rally (DBR), where prices drop (Drop) due to excessive selling, pause in a base, then reverse upward (Rally) when buying wins; and Supply Zone Rally Base Drop (RBD), where prices rally (Rally) from excessive buying, pause, then reverse downward (Drop).

The second style is trend continuation, which occurs more frequently, such as Rally Base Rally (RBR) in an uptrend or Drop Base Drop (DBD) in a downtrend, where prices pause in a range and then continue in the same direction.

In summary, supply and demand are key components in price determination, whether for economists or traders. If we understand and can predict this relationship, we can better forecast prices and timing trades. However, it’s crucial to study and practice with real asset prices to gain a clearer picture.