Key points investors need to know: Supply, demand, and price movements in the financial markets

Why Do Traders Make Buy and Sell Decisions Based on Supply and Demand

When you observe stock price movements, you might wonder what truly causes the price to go up or down. The answer is not as complicated as you might think because, in the financial market, prices are driven by a simple concept: demand and supply readiness to sell. When more people want to buy than want to sell, the price tends to rise. Conversely, when more people want to sell than buy, the price tends to fall. This simple idea forms the foundation for understanding the market.

Concept: What Are Demand and Supply?

Before applying these concepts to trading, we need to understand how demand and supply determine prices.

Buying Demand (Demand)

Demand is the quantity of goods or services that consumers are willing to buy at various price levels. The key characteristic of demand is an inverse relationship with price—the lower the price, the greater the desire to buy because:

• Income Effect: When prices fall, consumers have more remaining income, enabling them to buy more.
• Substitution Effect: When the price of a good decreases, it becomes a better option compared to other goods.

Factors influencing demand include:

• Consumers’ income
• Preferences and tastes
• Number of consumers
• Future price expectations
• Macroeconomic conditions

Selling Supply (Supply)

On the other hand, supply is the quantity of goods that sellers are willing to offer at various price levels. Unlike demand, supply has a direct relationship with price—as prices increase, sellers are motivated to sell more because:

• Profitability increases, encouraging producers to produce more.
• Relative costs decrease compared to revenue.

Factors affecting supply include:

• Production costs
• Technology
• Number of sellers
• Price expectations
• External factors such as natural disasters or tax policies

Equilibrium Point (Equilibrium Point)

The actual market price does not depend solely on demand or supply but occurs at the point where both meet, called equilibrium.

At this point:

• Quantity demanded by consumers = Quantity supplied by sellers
• Prices tend to stabilize because there is no pressure to change

If the price is above equilibrium, there will be excess goods, prompting sellers to lower prices until equilibrium is restored. If the price is below equilibrium, shortages occur, and buyers are willing to pay higher prices until the market returns to equilibrium.

Demand and Supply in the Stock Market: How Is It Different from Goods Markets?

For stocks and financial assets, the principles of demand and supply still apply but are more complex because the influencing factors are interconnected.

Factors Affecting Stock Demand

• Macroeconomic Conditions: When interest rates are low, investors tend to seek higher returns from the stock market.
• Liquidity in the Financial System: Abundant cash increases investment in risky assets.
• Market Confidence: Positive outlooks lead to increased buying; negative outlooks lead to selling.

Factors Affecting Stock Supply

• Company Policies: Issuing new shares or buybacks affect the number of shares available.
• New Listings: IPOs introduce large quantities of shares into the market.
• Market Regulations: Rules like Silent Periods influence the amount of shares available for trading.

How to Trade Using the Demand and Supply Principle: Demand Supply Zone

A popular method is using Demand Supply Zones, which identify moments when prices lose equilibrium and are likely to establish a new balance.

Reading Buying and Selling Pressure from Candlesticks

• Green Candlestick (Close higher than open): Indicates buying pressure over selling, suggesting the price may continue upward.
• Red Candlestick (Close lower than open): Indicates selling pressure over buying, suggesting the price may continue downward.
• Doji Candlestick (Open ≈ Close): Shows equal strength between buyers and sellers; the price may stall.

Reversal Pattern Trading: Demand Zone (DBR) - Rally Base Rally

This situation occurs after a rapid price drop (Drop), indicating strong selling. The price then stabilizes within a range (Base). When buying and selling forces balance out, and new positive factors emerge, buying pressure resumes, breaking above the upper boundary (Rally).

Traders can buy at the breakout point above the range, setting a stop-loss below the range.

Reversal Pattern Trading: Supply Zone (RBD) - Rally Base Drop

This pattern is the opposite: the price rises (Rally), then consolidates in a range (Base). When negative factors appear, selling pressure dominates, breaking below the lower boundary (Drop), leading to a decline.

Traders can sell at the breakout point below the range, with a stop-loss above the range.

Continuation Pattern Trading: Following the Trend

Often, buying or selling pressure returns close to the previous price without reversing, continuing the existing trend.

• Rally Base Rally (RBR): Price rises, consolidates, then continues upward.
• Drop Base Drop (DBD): Price falls, consolidates, then continues downward.

These scenarios are suitable for trend-following trades, entering at the breakout of the range.

How to Use Candlestick Patterns and Support/Resistance

Analyzing Resistance (Resistance)

Resistance is a price level where selling pressure is expected, often because investors believe the price is high enough. The price attempts to break through but repeatedly hits a barrier of selling.

Analyzing Support (Support)

Support is a price level where buying pressure is expected. When the price drops to this level, buyers step in to prevent further decline.

When the price breaks through support or resistance, large candlesticks often appear, indicating strong momentum in the new direction.

Important Things Investors Should Know

Although the demand and supply principle appears simple, applying it effectively in the market requires experience and practice. Those seeking deeper understanding should study actual price movements frequently, develop a feel for reading buying and selling pressure, and then apply these principles efficiently in their investments.