Demand and Supply Curves: The Key to Price Prediction and Investment Decisions

New investors often wonder why stock prices keep rising and falling continuously. The real answer is simple: demand and supply are the main drivers. Understanding this principle not only helps investors analyze the market better but also enables them to make smarter investment decisions and assess risks more precisely.

Understanding Demand and Supply: When Price Changes, Demand Changes

Demand and supply are fundamental concepts in economics, determining that price movements result from imbalances between buyers and sellers. When more people want to buy than sell, prices go up; conversely, when the opposite occurs, prices fall.

Demand: Varying Buying Interest Based on Price

Demand refers to the quantity of goods or services that buyers want to purchase at each price level. When plotted on a graph, it forms the demand curve, which slopes downward from top-left to bottom-right. This inverse relationship exists because: higher prices = lower demand; lower prices = higher demand.

Why is this? There are two main reasons:

Income Effect: When prices drop, consumers feel they have more purchasing power, enabling them to buy more. For example: if a phone’s price decreases, people already planning to buy will purchase more, and new buyers may enter the market.

Substitution Effect: When a product’s price decreases, buyers tend to choose this cheaper option over other alternatives.

Other factors influencing demand include:

• Consumer income
• Tastes and preferences
• Prices of related goods
• Number of consumers in the market
• Future price expectations
• Psychological factors like consumer confidence

Supply: Willingness to Sell Based on Value

Supply refers to the quantity of goods or services that sellers want to sell at each price level. The supply curve slopes upward from bottom-left to top-right, opposite to the demand curve.

There is a positive relationship: higher prices = increased willingness to sell; lower prices = decreased willingness to sell, as sellers are reluctant to sell below their costs.

Factors affecting supply include:

• Production costs
• Prices of alternative products
• Number of competitors
• Technology and production efficiency
• Future price expectations
• Tax policies and price controls
• External factors like weather and environment

How to Identify the Equilibrium Price: When Demand Meets Supply

Equilibrium is the point where the demand and supply curves intersect. At this point, the price and traded volume are stable and tend not to fluctuate significantly.

Why? Consider the natural market dynamics:

If the price is above equilibrium, sellers will flood the market with goods, while buyers will reduce purchases → surplus occurs → sellers lower prices → return to equilibrium.

If the price is below equilibrium, buyers will rush to purchase, while sellers reduce sales → shortage occurs → sellers raise prices → return to equilibrium.

Thus, equilibrium is the “most satisfactory” point for the market, and investors need to understand where current prices stand relative to this point.

Demand and Supply Curves in Financial Markets: Factors Driving Stock Prices

In financial markets, the same principles apply to stocks, bonds, and other assets, but the factors influencing demand and supply are more complex.

Factors Affecting Demand in Financial Markets

• Macroeconomic Factors: Interest rates, inflation, economic growth. When interest rates are low, investors seek higher returns in stocks → demand increases.
• System Liquidity: Money supply and borrowing ease. More liquidity means higher purchasing power → demand rises.
• Investor Confidence: Confidence in the economy, companies, or government policies. Higher confidence → more buying; fear → selling.
• News and Unexpected Events: Good news boosts demand; bad news reduces it.

Factors Affecting Supply in Financial Markets

• Company Policies: Capital raising increases supply; share buybacks decrease it.
• New Listings (IPOs): New companies entering the market increase supply.
• Market Regulations: Rules on trading, lock-up periods, etc.
• Major Shareholders’ Actions: Large shareholders’ decisions to sell or hold.

Analyzing Candlestick Charts and Supply-Demand Zones: Spotting Good Trading Opportunities

Among traders, these short terms may seem confusing, but they are proven methods to see what the market is doing.

Tools Traders Use to Read Demand and Supply

1. Candlestick and Price Action

• Green candles (close > open) = buying strength = strong demand
• Red candles (close < open) = selling strength = strong supply
• Doji (close ≈ open) = indecision

2. Trends and Price Movements

• Higher highs = strong demand = uptrend
• Lower lows = strong supply = downtrend
• Range-bound movement = equilibrium = wait for new signals

3. Support & Resistance Levels

• Support = buyers waiting → strong demand at this level
• Resistance = sellers waiting → strong supply at this level

Using Demand and Supply Zones for Trading: Practical Examples

Demand and Supply Zones are techniques that apply demand and supply principles to identify trading opportunities in two ways:

1. Reversal Trading

Scenario: DBR (Drop Base Rally) — Uptrend:

• Price drops sharply (Drop) due to strong selling
• Price consolidates in a range (Base) as selling weakens and buying starts
• Price breaks out upward from the base (Rally) as buying overtakes selling
• Entry point: at breakout above the base, with a stop-loss below the base

Scenario: RBD (Rally Base Drop) — Downtrend:

• Price rises sharply (Rally) due to strong buying
• Price consolidates (Base) as buying weakens and selling resumes
• Price breaks downward from the base (Drop) as selling overtakes buying
• Entry point: at breakdown below the base, with a stop-loss above the base

2. Trend Continuation Trading

Scenario: RBR (Rally Base Rally) — Uptrend continues:

• Price moves higher, making new highs (Rally)
• Price pauses in a range (Base) as sellers appear
• Price breaks higher again (Rally) on good news
• Entry: at breakout above the base

Scenario: DBD (Drop Base Drop) — Downtrend continues:

• Price drops further, making new lows (Drop)
• Price consolidates (Base) as buyers re-enter
• Price drops again (Drop) on bad news
• Entry: at breakdown below the base

Summary: Demand and Supply Curves as a Compass for Investors

Demand and supply are not just academic theories; they are practical tools used daily by investors and traders to understand market movements.

The best learning is to observe real stock prices today, note when you see signals like DBR or RBR, record them, and track what happens afterward. Repeating this process will help you see the market’s intentions clearly, giving you an edge as an investor.