Supply and demand: The key to understanding financial markets

Many people have heard the terms Demand and Supply when discussing stock prices or volatile assets in the market, but they may not fully understand how this basic economic concept actually works in the real world of investing. In fact, understanding Demand and Supply not only helps traders and investors read the market more accurately but also provides a fundamental basis for explaining why prices move up and down as they do.

Before discussing the market, let’s understand the basic concepts first

Buy and sell desires are the driving forces that create prices in the market. The relationship between these two sides determines where the price will settle.

Buy side: (Demand)

Demand does not refer to an individual’s order but to the total willingness of all buyers to purchase goods or services at various prices. When prices fall, consumers tend to want to buy more; when prices rise, their demand generally decreases.

The Law of Demand describes this inverse relationship: when the price decreases, the quantity demanded increases, and vice versa. The resulting effects are twofold:

Income Effect (Income Effect): When a stock’s price drops, your money becomes more valuable, allowing you to buy more shares with the same amount of money.

Substitution Effect (Substitution Effect): When one stock becomes cheaper relative to similar stocks, investors tend to switch and buy the cheaper one.

Other factors influencing demand include investors’ income, liquidity in the financial system, confidence in the economy, and expectations of future price movements.

( Sell side: )Supply###

Supply is the quantity of goods or services that sellers are willing to offer at various prices. It generally moves in the same direction as the price.

The Law of Supply: When prices increase, sellers are willing to sell more because profits are higher; when prices decrease, the quantity they are willing to sell declines.

Factors affecting supply in the financial markets include production costs (or operational costs for companies), policies for capital increases or share buybacks, entry of new companies into the market, and legal regulations.

( Equilibrium Point: )Market Equilibrium(

The actual market price is not determined solely by demand or supply alone but occurs at the equilibrium point—the intersection where demand and supply curves meet.

When prices rise above the equilibrium, excess stocks remain, forcing sellers to lower prices. When prices fall below, buyers want more than what’s available, pushing prices upward. This cycle continues until the market stabilizes at equilibrium.

Financial markets: When Demand and Supply determine stock prices

Whether it’s common stocks or other financial assets, prices result from the pressure between buying and selling sides. However, in financial markets, the factors driving demand and supply are more complex.

) Factors increasing demand in the stock market

• Low interest rates: When banks offer low interest rates, savings accounts yield less, so investors flow into the stock market instead.
• Economic growth: When companies are more profitable, investors are willing to buy shares at higher prices.
• Investor confidence: Positive news about companies or the economy strengthens buying interest.
• High liquidity: More money flows into the market, making it easier for investors to buy.

Factors increasing supply of stocks

• Companies issuing new shares: The total number of shares in the market increases, raising supply.
• New IPOs: Introducing new stocks floods the market, overshadowing waiting sellers.
• Major shareholders selling: When buybacks occur, supply decreases; however, excessive capital increases can depress prices.

Reading trading signals: When Demand and Supply appear in candlesticks

Traders use various technical tools to observe buying and selling pressures in each candlestick.

( 1. Green and red candlesticks

Green candlestick )Close price higher than open### indicates strong demand — buyers won this day, and prices tend to continue upward.

Red candlestick ###Close price lower than open### indicates strong supply — sellers dominated, and prices tend to decline.

Doji candlestick (Open and close are close) shows a balance between both sides — an unclear base for the next move.

( 2. Price trend and buy-sell momentum

Uptrend )Making new highs continuously( = Demand dominates — buying pressure wins.

Downtrend )Making new lows continuously### = Supply dominates — selling pressure wins.

Sideways (Price moves within a range) = Balance — both sides are equally strong.

( 3. Support and Resistance: Indicators of Demand and Supply

Support )Support(: Price level where investors are willing to buy; if the price drops to this level, demand will push it back up.

Resistance )Resistance###: Price level where investors see it as expensive and are willing to sell; if the price reaches this level, supply will push it back down.

Demand Supply Zone Technique: Timing buy and sell with Demand and Supply

A popular method is the Demand Supply Zone — identifying points where price temporarily loses balance, causing rapid movement (up or down) to seek a new equilibrium.

( Type 1: Reversal )Reversal(

DBR - Drop Base Rally )Excess supply###

• Price drops sharply due to excess supply
• Then consolidates in a base
• When good news arrives, strong buying returns, breaking above the base and soaring
• Entry point: at the breakout above the base

RBD - Rally Base Drop (Excess demand)

• Price rises sharply due to excess demand
• Then consolidates in a base
• When bad news hits, strong selling returns, breaking below the base and dropping
• Entry point: at the breakout below the base

( Type 2: Continuation )Continuation(

RBR - Rally Base Rally )Demand remains strong(

• Price rises > consolidates > continues upward
• Indicates persistent buying power after brief pause
• Entry point: when breaking above the base

DBD - Drop Base Drop )Supply remains strong###

• Price falls > consolidates > continues downward
• Selling pressure persists
• Entry point: when breaking below the base

Applying Demand and Supply principles in analysis

( In fundamental analysis )Fundamental Analysis(

When positive news about a company emerges )higher profits, successful expansion(, demand for the stock increases. Investors are willing to pay higher prices, pushing the stock price up.

Conversely, negative news causes shareholders to exit, increasing supply. Fearful investors sell, driving prices down.

) In technical analysis ###Technical Analysis(

Traders observe price levels, trading volume, and candlestick patterns to assess whether demand and supply are shifting.

• High buy volume + rising prices = Strong demand
• High sell volume + falling prices = Strong supply
• Low volume + sideways prices = Equilibrium, unclear trend

Practical example of Demand and Supply timing

Suppose XYZ stock receives positive news recently:

1. Initial entry )Day 1(: Buying pressure floods in, price jumps 10%, large green candle — Demand dominates

2. Pause )Days 2-3###: Some investors take profits, supply increases, price consolidates — Balance

3. Decision (Day 4): Continued positive news > buying resumes > price breaks above the base > strong momentum = Another entry point

Summary: Why understanding Demand and Supply is essential

Demand and Supply are not just economic theories in textbooks but natural forces that drive stock price movements in real markets.

When you understand that:

• Good news increases demand, pushing prices up
• Bad news increases supply, pushing prices down
• Price oscillates within a range = uncertainty between the two sides

You can read the market more accurately, time your trades more effectively, and avoid mistakes caused by poor analysis.

Mastering trading requires an understanding of Demand and Supply because they are the fundamental principles behind price movements.