The laws of supply and demand: the main drivers of price changes in the market

In the investment world, whether in the stock market or other financial assets, investors often encounter the same question: “Will prices go up or down in the future?” The answer to this question lies in the fundamental economic principle called Supply and Demand, which is the mechanism that drives everything in the market, including company stocks, to move according to buying and selling pressures.

Basic Understanding: Buying Demand vs Selling Supply

Demand (Demand): The buying force that establishes the price foundation

Demand is not just a desire to buy certain quantities; it is the relationship between different price levels and the quantity that buyers are willing to pay. When prices decrease, buyers are generally more willing to purchase more. When prices rise, that willingness diminishes.

This mechanism stems from two main phenomena:

Income Effect: When goods become cheaper, the value of your money increases, allowing you to buy more. Conversely, if prices are high, your money’s elasticity decreases.

Substitution Effect: When a good is cheaper than its substitutes, people tend to buy more of this good. When it becomes more expensive, they switch to alternatives.

Factors influencing demand:

• Consumers’ income levels
• Prices of substitute goods
• Future price expectations
• Market preferences and tastes
• Number of buyers in the market
• Psychological factors such as financial confidence

Supply (Supply): The selling force controlling supply

Supply is the quantity of goods or services that sellers are willing to provide at various price levels. The role of supply is opposite to demand in many aspects.

Law of Supply: The relationship is directly proportional. When prices increase, sellers are willing to supply more. When prices decrease, their willingness to sell diminishes.

The reason is straightforward: higher prices mean higher profit per unit, so producers are willing to increase production. When prices fall, the financial incentive decreases accordingly.

Factors affecting supply:

• Production costs and raw materials
• Technology and production efficiency
• Prices of alternative products that producers can make
• Number of sellers in the market
• Future price expectations
• Government policies and regulations

The Origin of Stock Prices: Determined at Equilibrium Point

The actual price does not arise solely from demand or solely from supply. It occurs at the point where the two lines intersect—called Equilibrium.

At this point:

• The quantity demanded by buyers matches the quantity supplied by sellers
• Prices tend to stabilize because there is no pressure to change

But what happens when prices move away from equilibrium?

If the price is above equilibrium: Sellers want to sell more than buyers want to buy, leading to excess inventory. Sellers lower prices to clear stock, pushing the price back down.

If the price is below equilibrium: Buyers want more than is available, causing shortages. Sellers raise prices to feel comfortable, pushing the price up.

This mechanism is automatic—markets always seek a new equilibrium.

Demand and Supply in Financial Markets: Factors with High Complexity

When discussing stocks or financial assets, the laws of demand and supply still apply, but the factors driving demand and supply are much more complex.

( Demand side: What makes investors buy?

• Macroeconomic data: When interest rates are low, investors tend to move away from bonds and look for stocks with higher returns. Demand for stocks increases.
• Market liquidity: When there is a lot of money circulating in the system, people have more funds to invest.
• Sentiment and expectations: If investors believe a company will grow, they are willing to buy at higher prices. If they fear problems, they sell off.

) Supply side: What causes more or fewer stocks to be available?

• Corporate decisions: Issuing new shares ###IPO### increases stock availability; buybacks reduce the number of shares.
• New listings: New companies entering the market bring in significant capital.
• Legal regulations: Rules such as silent periods or restrictions on share sales can limit supply.

Analyzing Stock Prices Through Technical Analysis: Finding Imbalances

Traders use various technical tools to predict movements of demand and supply:

( 1. Candlestick Analysis )

• Green candlestick ###Close higher than open(: Buying pressure wins; demand is strong.
• Red candlestick )Close lower than open(: Selling pressure wins; supply is strong.
• Doji )Open equals close(: Equal forces of demand and supply; price is indecisive.

) 2. Trend Following (Trend Following)

• If prices make new highs: demand wins; uptrend continues.
• If prices make new lows: supply wins; downtrend persists.
• If prices fluctuate within a range: both sides are battling; a pause or consolidation.

3. Support & Resistance (Support & Resistance)

• Support: A level where buying interest is expected; prices usually do not fall below.
• Resistance: A level where selling interest is expected; prices usually do not rise above.

Demand Supply Zone Technique: Focusing on Imbalance Moments

This technique looks for periods where demand or supply exceeds, causing prices to jump sharply. Afterward, prices pause and seek a new balance point.

Reversal Patterns (Reversal)

1### Demand Zone - Drop Base Rally (DBR)

• Price drops rapidly )Drop( due to heavy selling
• Then price consolidates in a )Base( as selling slows
• When buying returns strongly, price surges )Rally(
• Traders buy at breakout points

2) Supply Zone - Rally Base Drop (RBD)

• Price rises quickly )Rally( due to strong buying
• Then price consolidates in a )Base( as buying slows
• When selling pressure resumes, price drops )Drop(
• Traders sell at breakdown points

) Continuation Patterns (Continuation)

1### Demand Zone - Rally Base Rally (RBR)

• Price rises )Rally(
• Pauses in a )Base(
• Continues upward )Rally( as buying resumes
• Part of an uptrend

2) Supply Zone - Drop Base Drop (DBD)

• Price falls )Drop(
• Pauses in a )Base(
• Continues downward )Drop( as selling resumes
• Part of a downtrend

Investment Strategies Using Demand and Supply

) Fundamental Analysis Stock prices rise or fall based on profit forecasts. If analysts upgrade earnings estimates, buyers are willing to pay more, increasing demand and price. Conversely, negative news causes sellers to reduce supply, increasing supply and lowering prices.

( Technical Analysis Use volume and price data to identify imbalance zones and wait for prices to return to equilibrium.

Summary

Demand and supply are the engines that drive the market. Whether you invest in stocks or other assets, understanding the rules of supply and how they relate to price movements will help you make better decisions.

However, this knowledge is not just about reading charts. You need to practice on real price graphs, continuously learn, and refine your market reading skills to recognize patterns and catch opportunities more accurately.