Supply and demand are the key to understanding changes in asset prices.

Why Traders Need to Understand Supply and Demand

In financial markets, prices do not arise from mysterious reasons but are the result of clear forces—buying and selling pressures, or what is called Supply and Demand. This concept is the foundation of economics that explains how prices move and why. For investors and traders, understanding this idea is not just academic; it is a practical tool for predicting price directions and timing trades effectively.

What Do Supply and Demand Really Mean?

To clarify, think of an auction. If more people want to buy than want to sell (high demand), prices will be pushed higher. Conversely, if many are selling but few want to buy (high supply), prices will need to decrease to attract buyers.

Supply and demand operate like a seesaw in the market. When a certain point is evaluated, prices stop and then reverse—this is the origin of price movements in stocks and assets.

Demand (Demand) - What is “buying interest”?

Demand refers to the quantity or amount of goods or services that buyers are willing to purchase at various prices. When prices are low, buyers are willing to buy more; when prices are high, demand decreases. This is the basis of the Demand Curve (Demand Curve), which slopes downward to the right, showing an inverse relationship between price and quantity.

Factors influencing demand include:

• Buyers’ income: When the economy is good, people have more money, increasing demand.
• Expectations: If people expect prices to rise, they buy now.
• Confidence: When market sentiment is optimistic, investment demand increases.
• Other variables: Tastes, seasons, new technologies.

Supply (Supply) - The willingness to sell

Supply is the quantity that sellers are willing to bring to market at various prices. Unlike demand, which decreases as prices rise, supply increases with higher prices because of higher profits. This results in the Supply Curve (Supply Curve), which slopes upward to the right.

Factors determining supply include:

• Production costs: Lower costs encourage more supply.
• Technology: New technology makes production cheaper.
• Number of producers: New companies entering the market increase supply.
• Price expectations: If sellers expect prices to fall, they sell more now.

Equilibrium (Equilibrium) - When buying and selling forces balance

Demand or supply alone cannot set prices. Actual prices occur where the demand and supply curves intersect—this is the equilibrium point.

At this point:

• Quantity demanded = Quantity supplied
• There is no “overproduction” (unsold goods)
• There is no “shortage” (no goods available)
• Prices tend to stabilize until new factors emerge

When prices are above equilibrium (too high), supply exceeds demand → inventory builds up → prices fall.

When prices are below equilibrium (too low), demand exceeds supply → shortages occur → prices rise.

Supply and Demand in the Stock Market - Why Do Stock Prices Fluctuate?

Stocks are homogeneous products. The factors that determine supply and demand also affect stock prices, but instead of physical goods, the demand is for ownership of companies.

What influences demand in the stock market?

From investors’ perspective:

• Company profits: Good profits → increased desire to buy → demand rises → price increases
• Interest rate policies: Low interest rates → lower bond yields → investors prefer stocks
• Market liquidity: When liquidity is high → more money available to buy stocks
• Confidence: Optimism about economic prospects → more buying

What influences supply in the stock market?

From companies’ side:

• Issuance of new shares: Companies issuing new shares → increased supply → downward pressure on price
• Share buybacks: Companies repurchasing their shares → reduced supply → upward pressure
• New IPOs: New companies entering the market → overall supply increases
• Shareholders selling: Investors selling off holdings due to expectations of falling prices → increased supply

How to Use Supply and Demand Zones in Trading - Demand Supply Zone

The most popular method is Demand Supply Zone, which involves identifying points where price loses balance and waiting for it to revert back toward the new equilibrium.

Example 1: DBR - Demand Zone Drop Base Rally (Uptrend from a low base)

Scenario: Stock price drops sharply (Drop)

• Indicates excess (selling pressure)
• Traders see the zone as attractive and start buying
• Price consolidates and forms a base (Base) within a narrow range
• Good news triggers buying interest, pushing price up (Rally)

Trading cue: Buy when price breaks out of the base, with a stop-loss placed below the base.

Example 2: RBD - Supply Zone Rally Base Drop (Downtrend from a peak)

Scenario: Price rises rapidly (Rally)

• Shows strong (buying demand)
• As price peaks, many traders take profits and sell
• Price consolidates, forming a base (Base) in a narrow range
• Negative news causes increased selling, pushing price down (Drop)

Trading cue: Sell when price breaks below the base, with a stop-loss above the base.

Example 3: RBR - Continuation in an Uptrend

When buying pressure remains:

• Price rises (Rally) quickly
• Many traders see it as overextended and take profits
• Price consolidates, forming a base (Base)
• But buying interest returns strongly → price continues upward (Rally again)

Trading cue: Enter on a breakout of the base.

Example 4: DBD - Continuation in a Downtrend

When selling pressure persists:

• Price drops (Drop) rapidly
• Investors see the price as cheap and buy, supporting the price
• Price consolidates, forming a base (Base)
• But selling pressure resumes → price continues to fall (Drop again)

Trading cue: Sell on a breakdown of the base.

Using Price Action to Read Supply and Demand Signals

Even without complex techniques, candlestick patterns can help interpret market sentiment:

• Large green candle: Indicates strong buying dominance—willingness to push prices higher
• Large red candle: Indicates strong selling dominance—price is being pushed down
• Doji (small candlestick with shadows): Equal buying and selling pressure—uncertain, wait for new signals

Price Forecasting - Anticipating Changes in Supply and Demand

If you can identify:

• Increasing demand (Good news, strong economy, lower interest rates) → Expect price to rise
• Increasing supply (Bad news, companies issuing new shares) → Expect price to fall
• No new factors (Stable conditions) → Price may fluctuate within a range

Sometimes, supply and demand factors occur simultaneously. For example, a strong economy encourages investors to buy more, but companies also issue new shares, which can offset each other.

Summary

Supply and demand is not just a theoretical concept but a practical tool for predicting stock and asset prices.

A basic rule to remember:

• When demand exceeds supply, prices tend to rise.
• When supply exceeds demand, prices tend to fall.
• Equilibrium occurs when both are balanced.

And when prices deviate from equilibrium, they tend to revert back, creating clear trading opportunities.

Practicing by observing real market prices enhances understanding—this is the essence of developing trading skills.