What are Demand and Supply: A Guide for Traders and Investors

Understanding the Basics: What Do Demand and Supply Mean

Demand and Supply are at the core of asset pricing in the market. Demand represents the desire to buy, while supply represents the desire to sell. When these two forces meet, an equilibrium price is established.

This fundamental concept is not just a matter of economic textbooks but is a tool traders use daily to forecast the direction of stock prices, currencies, and other financial assets.

What is (Demand)?

Demand refers to the quantity of goods or assets that buyers are willing to purchase at various price levels. When illustrating the relationship between price and quantity on a graph, it results in the (Demand Curve).

The law of demand states: When the price decreases, the desire to buy increases. Conversely, when the price rises, the desire to buy decreases. This inverse relationship is caused by two factors:

• Income Effect (Income Effect): When prices fall, buyers have more money left, enabling them to purchase more.
• Substitution Effect (Substitution Effect): When prices are lower compared to other goods, buyers prefer this good more.

Factors influencing demand include: price levels, consumer income, prices of substitute goods, tastes, number of buyers, future price expectations, and market confidence.

What is (Supply)?

Supply refers to the quantity of goods or assets that sellers are willing to put on the market at various price levels. The (Supply Curve) illustrates this relationship.

The law of supply states: When prices increase, sellers are willing to sell more. When prices decrease, sellers reduce the quantity supplied. This positive relationship differs from demand.

Factors affecting supply include: price levels, production costs, prices of substitute goods that producers can produce, competition, technology, price expectations, weather and natural disasters, tax policies, and access to funding sources.

Market Equilibrium(

Actual market prices are not set by demand or supply alone but occur at the intersection point of the demand and supply curves. This is called )Market Equilibrium(.

At this point, the quantity buyers want equals the quantity sellers want to sell. The price has no pressure to change.

Situations where the price is above equilibrium: Sellers are willing to sell more, but buyers want to buy less, leading to surplus, which pressures the price to fall back to equilibrium.

Situations where the price is below equilibrium: Buyers want to buy more, but sellers want to sell less, leading to a shortage, which pushes the price up toward equilibrium.

Demand and Supply in the Real Financial Markets

In stock and financial markets, demand and supply are constantly active, but the factors driving these forces are more complex than in natural commodity markets.

) Factors Driving Demand

• Macroeconomic Conditions: Growth rates, inflation, interest rates. When interest rates are low, investors seek higher returns in the stock market, increasing demand.
• Liquidity in the Market: An increase in money supply results in investors having more funds to buy assets.
• Investor Confidence: Economic outlook forecasts, company performance, political stability.

Factors Driving Supply

• Corporate Policies: Capital raising, share buybacks, dividend distributions—all affect the number of shares available.
• Entry of New Companies: When new companies go public via IPO, the number of securities in the market increases.
• Regulations: Rules on share sales, silent periods, and other compliance requirements.

From Theory to Practice: Applying Demand and Supply in Trading

1. Fundamental Analysis

Stocks are commodities; their prices depend on demand and supply. When good news emerges, investors want to buy more ###demand increases(, while sellers hold back )supply decreases(. The result is a price increase.

Conversely, bad news causes investors to sell off )supply increases(, while buyers hold back )demand decreases(, leading to a price decline.

Factors influencing valuation changes include: quarterly profit forecasts, economic growth, structural changes.

) 2. Technical Analysis

Traders use various tools to measure unseen buying and selling pressures.

Candlestick Analysis ###Candle Stick(:

• Green candle )closes higher than open(: Strong demand, buyers win.
• Red candle )closes lower than open(: Strong supply, sellers win.
• Doji )open-close close together(: Balance of forces, uncertainty.

Trend Evaluation )Market Trend(:

• Making new highs: Strong demand, uptrend continues.
• Making new lows: Strong supply, downtrend continues.
• Moving within a range: Balance of forces, waiting for new signals.

Support & Resistance )Support & Resistance(:

• Support: Area where demand is waiting to buy; price dips or oscillates around this level.
• Resistance: Area where supply is waiting to sell; price rises or oscillates around this level.

Demand Supply Zone Technique: Trading Examples

Modern traders use the Demand Supply Zone technique to identify moments when price loses balance and seeks a new equilibrium.

) Reversal Trading ###Reversal(

Case 1: DBR - Demand Zone Drop Base Rally )Reversal to Uptrend(

• Price drops sharply )Drop( due to excess supply.
• At the low, buyers step in, and the price starts to oscillate within a )Base(.
• When good news arrives or buying pressure wins, the price breaks out upward )Rally(.
• Traders enter at the breakout point, setting stop-loss below the range.

Case 2: RBD - Rally Base Drop )Reversal to Downtrend(

• Price rises sharply )Rally( due to excess demand.
• At the high, sellers step in, and the price oscillates within a )Base(.
• When bad news arrives or selling pressure wins, the price breaks down )Drop(.
• Traders enter at the breakout point, setting stop-loss above the range.

) Trend Following Trading ###Continuation(

Case 1: RBR - Rally Base Rally )Uptrend Continuation(

• Price moves higher )Rally 1( due to strong demand.
• At the high, some sellers appear, and the price oscillates within a )Base(.
• Buying pressure resumes, breaking resistance and pushing the price higher )Rally 2(.

Case 2: DBD - Drop Base Drop )Downtrend Continuation(

• Price drops )Drop 1( due to strong supply.
• At the low, some buyers appear, and the price oscillates within a )Base(.
• Selling pressure resumes, breaking support and driving the price further down )Drop 2(.

Why Is This Important for Investors?

Demand and supply are mental tools to understand price movements, not just “cause and effect” but driven by real forces active in the market.

Investors who understand these forces can:

• Identify areas where prices are likely to reverse
• Forecast trend strength
• Time entries and exits effectively
• Manage risks better

However, theory alone is not enough. Studying real price charts, practicing trading, and consistent training are keys to truly understanding how demand and supply work in real markets.