Demand is the main driving force of the financial market—crucial for investors

Demand or buying interest and supply are at the heart of financial markets, driving asset price changes. Although this concept originates from economics, investors and traders can use it to predict price directions. Understanding that demand is the relationship between desire and quantity is key to developing effective investment strategies.

Basic Demand and Supply: Definitions and Differences

Demand is the desire to buy goods or services, which has an inverse relationship with price. When prices fall, consumers are willing to buy more; when prices rise, demand decreases. This relationship arises from two mechanisms: the income effect, where lower prices increase purchasing power, and the substitution effect, where buyers choose cheaper alternatives over more expensive ones.

Conversely, supply is the willingness to sell goods, which correlates directly with price. Higher prices motivate sellers to produce and sell more, increasing supply; lower prices cause them to reduce output.

Principles of Demand and Supply: How Equilibrium Works

Equilibrium is the point where the demand and supply curves intersect on a graph. At this point, the quantity buyers want to purchase matches the quantity sellers want to sell, resulting in stable prices that tend to persist.

When prices rise above equilibrium, sellers want to supply more, but buyers reduce demand, leading to excess supply and downward pressure on prices. Conversely, when prices fall below equilibrium, demand increases while supply decreases, causing shortages and upward price movement.

This market mechanism often causes prices to oscillate around the equilibrium, which is a basis for price forecasting for investors.

Factors Influencing Demand in Financial Markets

Demand for assets is affected by more than just price. Key factors include:

• Economic Stability: Strong economic growth and high confidence lead investors to buy more stocks.
• Interest Rates: Low interest rates reduce returns from savings, prompting investors to seek higher yields in stocks.
• Market Liquidity: Abundant money in the system increases investment demand.
• Market Sentiment and Psychology: News about companies, economic forecasts, political events all influence investment decisions.

Factors Influencing Supply in the Stock Market

Supply of stocks and assets depends on several factors:

• Corporate Policies: Share buybacks reduce supply; issuing new shares increases it.
• Initial Public Offerings (IPOs): New companies entering the market add to available securities.
• Stock Exchange Regulations: Restrictions on selling after IPO affect supply.
• Production Costs: Technology, taxes, and fundamental conditions impact a company’s capacity to produce and issue shares.

Applying Demand and Supply in Stock Analysis

Demand and supply principles are crucial for analyzing stock prices, mainly through two methods:

Fundamental Analysis

Investors view stocks as representatives of a company’s market value. Good news, such as improved earnings or expansion plans, increases demand, leading to higher prices and trading volume. Bad news dampens demand, causing prices to fall.

Technical Analysis

Traders use various tools to measure demand and supply:

Candlestick Charts: Green candles (close > open) indicate strong demand; red candles (close < open) suggest strong supply. Doji candles, with open and close prices close together, show indecision between buyers and sellers.

Trends: Rising higher highs indicate strong demand; lower lows suggest strong supply.

Support and Resistance: Support levels are price points where demand is expected to be strong enough to halt or reverse a decline; resistance levels are where supply is expected to cap upward movement.

Trading Strategies: From Theory to Practice

Demand and supply zones are popular trading methods based on these principles, with two main strategies:

Reversal Trading

Demand Zone Drop Base Rally (DBR): Price drops sharply due to excess supply, then consolidates in a base. When demand overtakes supply, price breaks out upward (Rally). Traders buy at the breakout.

Supply Zone Rally Base Drop (RBD): Price rises sharply due to strong demand, then consolidates. When supply overtakes demand, price breaks down (Drop). Traders sell at the breakdown.

Trend Continuation Trading

Rally Base Rally (RBR): Price advances strongly, consolidates, then continues upward due to renewed demand, often triggered by positive news.

Drop Base Drop (DBD): Price declines sharply, consolidates, then continues downward due to increased supply, often after negative news.

Summary

Demand is the main force driving financial markets from within, both in economics and actual investing. Understanding how demand and supply work, what factors influence them, and how to interpret price signals with various tools is essential for investors. Wise investing requires continuous learning and practical market experience to accurately gauge timing and make correct decisions in different situations.