Why do investors need to understand the laws of supply and demand in order to read the market?

Many people have heard the phrase “The stock market is driven by trading volume,” but the more accurate term is the law of supply and demand. This is the primary force that governs prices, whether in stocks, cryptocurrencies, or other assets in the financial markets.

Understanding this law well allows investors to overcome blind speculation and make buying and selling decisions more rationally.

What exactly are supply and demand?

Demand is the desire to buy, while supply is the desire to sell. Both are not independent but have an inverse relationship with price.

Demand ( – Where are the buyers?

When prices fall, buyers tend to be more willing to purchase more. Conversely, when prices rise, buyers may hold back or wait for a better opportunity.

Why is this? There are two main reasons:

Income Effect ) - When stock prices decrease, investors’ purchasing power increases, leaving them with more money to buy in larger quantities.

Substitution Effect ( - When the price of one coin drops, it becomes cheaper than similar coins, prompting investors to choose the cheaper option.

Besides price, demand is also affected by:

• Investors’ income
• Expectations of future prices
• Number of buyers in the market
• General confidence
• Current economic conditions

) Supply ( – Are sellers ready?

Sellers behave oppositely: when prices are high, they are willing to sell more; when prices are low, they prefer to wait or reduce their selling volume.

The law of supply clearly states that higher prices = increased selling volume, and lower prices = decreased selling volume.

Supply is also influenced by:

• Production costs
• Company technology
• Producer expectations
• Number of competitors
• Government policies
• Weather conditions ) for natural resources ###

Equilibrium ( – The “fair” price point

Demand or supply alone cannot determine the price. The actual price occurs at the intersection point of these two lines, called equilibrium.

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

When the price deviates from this point, adjustment forces come into play:

If the price is too high - Sellers increase supply, buyers reduce demand, leading to excess stock. The price is pushed down back to equilibrium.

If the price is too low - Buyers become satisfied and increase demand, sellers reduce supply, causing shortages. The price is pushed up back to equilibrium.

How do supply and demand work in the financial markets?

In crypto and stock markets, supply and demand are more complex because many factors are involved and interconnected.

) Additional demand factors

• Global economy - When the Fed lowers interest rates, investors often seek higher returns in stocks and crypto.
• Liquidity - The more money flowing into the market, the stronger the demand.
• Investor confidence - Good or bad news, earnings reports, or influential posts can all impact demand.

( Additional supply factors

• Company policies - Stock buybacks reduce supply; issuing new shares increases supply.
• New IPOs - New companies listing on the market add to the available securities.
• Regulations - Market rules like Silent Periods or other requirements affect selling volume.

How can investors apply supply and demand principles?

) 1. Fundamental Analysis (Fundamental Analysis)

Rising or falling stock prices reflect expectations about earnings and company value.

• Good earnings → Investors expect continued growth → Demand increases → Price rises
• Disappointing earnings → Investors lose confidence → Demand decreases or supply increases → Price drops

2. Technical Analysis ###Technical Analysis###

Using price, volume, and various tools to observe buying and selling forces.

Price Action (Candlesticks)

• Green candle ###Close > Open( = Strong buying → Good demand signal
• Red candle )Close < Open( = Strong selling → Good supply signal
• Doji )Open ≈ Close( = Balanced buying and selling → Unclear direction

Market Trend )Trend(

• If prices make new highs consistently = Strong demand → Uptrend
• If prices make new lows consistently = Strong supply → Downtrend

Support & Resistance )Support & Resistance(

• Support = The lowest price level with enough demand to support a bounce; prices tend to reverse upward here.
• Resistance = The highest price level with enough supply to halt upward movement; prices tend to reverse downward here.

Demand Supply Zone Technique – How to catch buy/sell moments

This technique looks for points where price loses balance, either due to excess supply or demand, and waits for a “stagnation” point.

) Four trading patterns

1. DBR (Drop Base Rally) – Reversal to an uptrend

• Price drops sharply (Drop) due to excess supply
• Consolidates in a range ###Base( as selling pressure diminishes and buying begins
• Price surges )Rally( when buying wins → Buy signal

2. RBD )Rally Base Drop( – Reversal to a downtrend

• Price rises quickly )Rally( due to strong demand
• Consolidates in a range )Base( as buying exhausts and selling pressure increases
• Price breaks down )Drop( when selling wins → Sell signal

3. RBR )Rally Base Rally( – Continuing uptrend

• Price moves up strongly )Rally( initially
• Consolidates in a range )Base( to build momentum
• Price moves higher )Rally( again → Uptrend continues

4. DBD )Drop Base Drop( – Continuing downtrend

• Price drops )Drop( initially
• Consolidates in a range )Base( to gather strength
• Price drops further )Drop( → Downtrend continues

Cautions

• Supply and demand can change rapidly due to new factors, so always set stop-loss points.
• Real markets are more complex than theory; market makers and unforeseen factors exist.
• Use multiple techniques; relying solely on supply and demand is insufficient. Combine with fundamental data, news, and other technical tools.

Summary

The law of supply and demand is not just a boring economic theory but a language the market speaks. Investors who understand this law well can read the flow of money, better predict prices, and most importantly, reduce losses from frequent wrong decisions.

Practicing with real prices and observing Demand Supply Zones in each candlestick will help investors see the bigger picture and improve their skills faster.