Understanding what Supply is: The key to evaluating asset prices in the financial market

Supply and Demand are considered the core of price movements in financial markets, whether in stock markets, commodities, or cryptocurrencies. This simple concept can help investors understand why prices go up or down, and more importantly, predict future price directions.

What is Supply: Selling Pressure and Asset Disposition

In general, Supply refers to the quantity of goods or services that sellers are willing to offer at various price levels. When applying this concept to financial markets, Supply means the amount of securities (such as stocks, bonds) available in the market at a given time.

Supply Curve and Basic Principles

When we plot the relationship between price and the quantity offered by sellers, we get the Supply curve (Supply Curve). The Law of Supply indicates that:

• Price increases → Selling pressure increases Sellers are willing to dispose of more assets at higher prices.
• Price decreases → Selling pressure decreases Sellers hold back from selling when prices are low.

This direct relationship differs from demand (Demand), which has an inverse relationship with price.

Factors Affecting Supply in Financial Markets

Supply is not static; it depends on several factors:

• Production and operational costs: If costs rise, sellers may reduce the quantity supplied.
• Corporate policies: Share buybacks (Buyback) reduce supply, while capital increases (Capital Increase) expand supply.
• New listings (IPO): Increase the number of securities in the market.
• Regulations and rules: Conditions like Silent Periods or laws regarding share sales affect the supply quantity.
• Future price expectations: If prices are expected to rise, sellers may delay selling.
• Liquidity access: The ability to access funds influences production capacity and sales.

What is Demand: Buying Pressure and Asset Preference

Demand or buying interest is the quantity of assets that investors or buyers are willing to purchase at various price levels. The demand curve (Demand Curve) shows an inverse relationship:

• Price drops → Demand increases More buyers see assets as cheaper and buy more.
• Price rises → Demand decreases Some buyers may wait or think prices are too high.

Main Factors Influencing Demand

• Macroeconomic factors: Economic growth, inflation rate, and interest rates.
• Financial system liquidity: The amount of money available in the market.
• Investor confidence: Expectations about company performance and political stability.
• Company performance: Financial results, news, and profit forecasts.
• Income effects: When asset prices fall, investors can buy more with the same amount of money.
• Substitution effects: When similar securities are available, investors prefer those with better returns.

Price Equilibrium (Equilibrium): The Point Where Supply and Demand Meet

The actual market price is usually the equilibrium price, where the Supply and Demand curves intersect. At this point:

• The quantity sellers want to sell equals the quantity buyers want to buy.
• Prices tend to stabilize until new factors influence the market.

If the price is above equilibrium: Excess supply occurs → Surplus → Strong selling pressure → Price drops.

If the price is below equilibrium: Excess demand occurs → Shortage → Strong buying pressure → Price rises.

Supply and Demand in Stock Price Analysis

Stocks and financial assets can be analyzed using the same principles. Understanding Supply is crucial because it helps investors realize that price changes are not random but driven by shifts in buying (Demand) and selling (Supply) pressures.

In Fundamental Analysis (Fundamental Analysis)

Stock prices reflect investors’ expectations about a company’s future:

• Good news (e.g., increased earnings, major contracts signed) → Demand increases → Buying pressure → Price rises.
• Bad news (e.g., decreased earnings, management issues) → Supply increases → Selling pressure → Price declines.

In Technical Analysis (Technical Analysis)

Traders use various tools to visualize Supply and Demand through price movements:

Price Action and Candlestick Patterns (Candlestick)

• Green candles (Close > Open): Indicate strong demand, buyers dominate.
• Red candles (Close < Open): Indicate strong supply, sellers dominate.
• Doji (Open ≈ Close): Show indecision between supply and demand.

Support (Support) and Resistance (Resistance)

• Support: Price level where demand is strong; investors tend to buy at lower prices.
• Resistance: Price level where supply is strong; investors tend to sell at higher prices.

Market Trends (Market Trend)

• Uptrend: Demand > Supply; new highs are continually made.
• Downtrend: Supply > Demand; new lows are continually made.
• Range-bound movement: Supply ≈ Demand; forces are balanced.

Demand Supply Zone: Advanced Trading Strategy

Demand Supply Zone refers to a technical trading area where significant excess of supply or demand exists. When price quickly moves away from these zones (Drop or Rally), it often retraces within a range to balance supply and demand.

Reversal Trading Patterns (Reversal)

1) DBR (Demand Zone Drop Base Rally) - Downtrend Reversal

• Price drops rapidly (Drop) due to strong supply.
• Consolidates in a range (Base) as selling pressure eases and buying interest increases.
• Positive news or data → Demand overtakes → Price reverses upward (Rally).

2) RBD (Supply Zone Rally Base Drop) - Uptrend Reversal

• Price rises quickly (Rally) due to strong demand.
• Consolidates (Base) as buying momentum slows and selling interest increases.
• Negative news or data → Supply overtakes → Price reverses downward (Drop).

Continuation Trading Patterns (Continuation)

1) RBR (Demand Zone Rally Base Rally) - Uptrend Continues

• Price accelerates upward → consolidates → positive news continues → upward trend persists.
• Traders buy on breakouts or when price stays above resistance.

2) DBD (Supply Zone Drop Base Drop) - Downtrend Continues

• Price drops rapidly → consolidates → negative news persists → downward trend continues.
• Traders sell on breakdowns or when price falls below support.

How to Use Supply and Demand to Time Trades

Analysis Steps

1) Identify Key Supply/Demand Zones Find areas where price previously changed direction, indicated by:

• Rapid drops or rises.
• Followed by consolidation.

2) Monitor the Connection of Buying/Selling Pressure

• If price revisits the same zone, it may react again.
• Confirm whether demand/supply remains strong via Price Action analysis.

3) Enter Low-Risk Trades

• For Reversals: Enter at breakout points of consolidation.
• For Continuations: Enter when price holds above/below resistance/support.

4) Set Smart Stop Losses (Stop Loss) Place outside consolidation zones to allow room for counter-moves.

Special Tips

• Watch trading volume: Higher volume indicates stronger demand/supply.
• Observe speed of movement: Fast drops/rallies suggest excess supply/demand.
• Wait for DBR/RBR completion: Do not rush; let Price Action confirm the move within the range.

Summary: Why Supply is Critical for Investors

Supply is not just an economic term but a serious analytical tool. Both long-term investors and short-term traders can leverage this concept:

• Long-term investors use overall market supply combined with fundamental data to decide when to buy stocks.
• Traders use Supply and Demand Zones to capture daily and hourly trading opportunities.

The key is continuous practice, observing real price charts, and refining skills through experience. Understanding Supply and Demand helps investors avoid reacting to random price fluctuations and instead see the fundamental reasons behind market movements.