Supply and Demand: The Fundamental Principles of Market Reading and Trading Strategies

In the world of investing and trading, the driving force behind asset price changes is not a mystery. By understanding the fundamental principles of supply and demand, investors can gain a clearer overall picture of market movements. This simple concept forms the foundation of economic theory and is used in analyzing stock and financial asset prices.

Meaning and Role of Supply and Demand

Supply and demand are the basic forces of buying and selling that collide in the market. It is important to distinguish the understanding of each side.

Demand ( - The buying force in the market

Demand is the quantity of goods or services that buyers want to acquire at various prices. When plotted on a graph, it produces a demand curve showing the relationship between price and quantity.

The law of demand states that when the price increases, the quantity demanded decreases, and vice versa. This phenomenon results from two effects:

• Income effect: When the price of a good drops, consumers’ real purchasing power increases.
• Substitution effect: When the price of a good decreases, it becomes a more attractive option compared to other goods.

Besides price, other factors influencing demand include: consumer income, preferences, number of buyers, future price expectations, and overall economic conditions.

) Supply ### - The selling force in the market

Supply is the quantity of goods or services that sellers are willing to offer at various prices. The supply curve shows a relationship that pushes in the same direction: higher prices lead to increased sales volume, lower prices lead to decreased sales.

The law of supply states that sellers are more motivated to sell when prices rise because the profit margin increases.

Factors determining supply include: production costs, technology, number of producers, substitute goods prices, price expectations, tax policies, and resource availability.

( Equilibrium: The point where prices stabilize

Market prices are not determined solely by demand or supply but occur at the point where the two curves intersect — the equilibrium point.

At this point, the quantity buyers want matches the quantity sellers want to sell, resulting in price stability:

• If the price is above the equilibrium point: excess supply occurs, and sellers are forced to lower prices.
• If the price is below the equilibrium point: excess demand occurs, and buyers push prices upward.

Applying Supply and Demand in Financial Markets

) Factors Driving Demand in the Stock Market

Macroeconomic factors: Low interest rates, economic expansion, and inflation all increase buying pressure. Investors move away from guaranteed securities and seek returns in stocks.

Liquidity: High money supply in the system enables investors to have greater purchasing power.

Confidence: Good earnings forecasts, positive news, or optimistic outlooks for companies attract buying interest.

Factors Driving Supply in the Stock Market

Corporate decisions: Capital increases expand supply; share buybacks reduce supply.

Initial Public Offerings (IPOs): New companies entering the market sell shares, increasing the total securities available.

Regulations: Selling restrictions, lock-up periods, or certain requirements affect the number of shares offered for sale.

Practical Trading and Analysis Applications

Fundamental Analysis

Stocks are commodities; price movements reflect the battle between buying and selling forces. An upward trend indicates demand dominance; a downward trend indicates supply dominance.

Fundamental factors such as expected profits, company growth, and management efficiency influence market expectations and cause shifts in demand or supply.

Technical Analysis

Candlesticks: A green ###close higher than open### candle indicates buying pressure; a red (close lower than open) indicates selling pressure; doji candles show equilibrium.

Trends: Making new highs suggests demand is strong; making new lows suggests supply is overpowering.

Support and Resistance: Support levels are points where demand is waiting to buy; resistance levels are points where supply is waiting to sell.

Demand Supply Zone Technique: Real Trading Examples

( Type 1: Reversal )Reversal###

DBR (Drop Base Rally): Price drops sharply, then forms a base and reverses upward. This indicates excess supply being released and buying momentum returning. Traders buy at the breakout point above the base.

RBD (Rally Base Drop): Price rises sharply, then forms a base and reverses downward. This indicates community demand, followed by a return of selling. Traders sell at the breakout point below the base.

( Type 2: Continuation )Continuation###

RBR (Rally Base Rally): Strong buying pressure, pauses briefly, then continues upward. Price breaks through previous resistance and moves toward a new target.

DBD (Drop Base Drop): Strong selling pressure, pauses briefly, then continues downward. Price breaks through previous support and moves toward a new target.

Summary

The law of supply and demand states that prices are the result of the clash between buying and selling forces. It is not just an economic theory for study but a powerful tool for traders and investors. A deeper understanding of this principle will help you read the market better and make more rational investment decisions. Practicing with real market data will help you see the bigger picture and gain valuable experience.