Supply and Demand Rules: The Reason Why Asset Prices Change

In the financial markets, investors often see stock prices go up or down each day, but few can explain why. In reality, these price movements are based on fundamental economic principles called demand (Demand) and supply (Supply). Understanding the rules of supply and the relationship between these two forces can be a key to making smarter investment decisions.

When does the market move: What are true demand and supply?

Demand does not just mean the desire to buy a product, but also the willingness of buyers to pay different prices to acquire that product. On a graph, we can see the (Demand Curve) that shows the relationship between price and the quantity buyers want.

Similarly, supply is the willingness of sellers to offer goods at various prices. The (Supply Curve) illustrates how much sellers want to sell at different prices.

When these two forces are combined, the point where the two lines intersect is the (Equilibrium)—the price and quantity set by the market.

The law of supply: Why do sellers decide to change?

The law of supply states that when prices increase, sellers will want to offer more goods, and when prices decrease, they will offer less. This seems straightforward: high prices = higher profit = motivation to sell.

However, in the stock market, the law of supply may not be as clear-cut as with regular goods. When stock prices rise, some investors see profit opportunities and choose to sell (Supply), while others still believe prices will go higher (Demand). This imbalance causes price fluctuations.

###Factors influencing supply:

• Production costs: If costs increase (such as higher wages), producers will reduce supply.
• Technology: New technology can increase efficiency and supply.
• Price expectations: If sellers expect higher prices, they may hold back sales.
• Number of sellers: More sellers = greater supply.
• Regulations: Government policies and market regulations directly impact supply.

The relationship between demand, supply, and price

Imagine this scenario: When the economy is growing well, investors are confident, and demand for stocks increases. At the same time, if companies decide to raise capital or issue more shares, supply also increases.

• Increased demand + constant supply → price rises
• Constant demand + increased supply → price falls
• Both increase → the outcome depends on which increases more

In financial markets, understanding this relationship helps investors anticipate when prices might change.

Applying this in trading techniques: Demand Supply Zone

Many traders use the “Demand Supply Zone” to identify trading opportunities. This technique looks for areas on the chart where there is an imbalance between demand and supply.

###Trading when the price “reverses”

• Supply Zone Rally Base Drop (RBD): Price surges (Rally) from demand, then consolidates (Base), and finally drops (Drop) when supply dominates.
• Demand Zone Drop Base Rally (DBR): Price plunges (Drop) from supply, then consolidates (Base), and eventually rallies (Rally) when demand takes over.

###Continuing trend trading

• Rally Base Rally (RBR): Price continues upward, indicating strong demand.
• Drop Base Drop (DBD): Price continues downward, indicating persistent supply.

Using tools like Price Action and support & resistance (Support & Resistance) analysis can help traders identify Demand Supply Zones more accurately.

Demand and supply in fundamental analysis

Long-term investors often use (Fundamental Analysis), which considers whether demand and supply are truly coming from.

For demand: When good news about a company is announced (such as high earnings, growth, or entering new markets), investors want to buy more shares, pushing prices higher.

For supply: When negative news occurs, shareholders may sell their holdings. If supply exceeds demand, prices tend to fall.

Investors who can assess the “intrinsic value” (Intrinsic Value) of a company can predict how demand and supply might change in the future.

Other tools to identify demand and supply

• Volume (Volume): High trading volume indicates strong demand or supply.
• Candlestick patterns (Candle Stick): Green candles = demand wins; red candles = supply wins.
• Moving Averages: Show long-term trends of demand and supply.
• RSI and Stochastic: Help identify overbought (excess demand) and oversold (excess supply) conditions.

Summary

The laws of supply and demand are not just economic theories but are forces that drive the daily movements of financial markets. Investors who understand where demand and supply come from and how to identify imbalances will have an advantage in making buy or sell decisions.

Whether using Demand Supply Zone techniques for short-term trading or fundamental analysis for long-term investing, applying demand and supply concepts can enhance market understanding and reduce investment risks.