Supply lines and price movement prediction in the market

If you are an investor looking to understand price movements, the supply and demand curves are among the most powerful tools for market analysis. This fundamental concept is not only used in economics but also effectively applied to forecast financial asset prices.

What is the Supply Curve and How Does It Relate to Price?

The supply curve shows the relationship between price levels and the quantity of goods or services that sellers are willing to offer at those prices. When prices rise, sellers typically want to sell more to earn higher returns. Conversely, when prices fall, they tend to reduce the quantity they supply.

In the stock market, the supply curve indicates the number of shares that existing shareholders or investors are willing to sell at various prices. For example, at 100 baht, there might be only 1 million shares for sale, but at 95 baht, only 500,000 shares are willing to be sold.

Demand and Supply: The Price-Setting Point

What is Demand?

Demand reflects the willingness of buyers to purchase at different price levels, with an inverse relationship to price. When prices are low, buyers tend to want to buy more; when prices are high, demand decreases.

Factors influencing demand include income levels, market confidence, future price expectations, consumer preferences, economic news, and even psychological factors like FOMO (Fear of Missing Out), which can drive demand changes.

Supply and the Supply Curve

The supply curve indicates the quantity of goods that sellers are willing to offer at various prices. Factors affecting supply include production costs, technology, access to resources, and future price expectations.

In the stock market context, the supply curve reflects the number of shares available for trading. Company policies (such as share buybacks or capital increases) and new IPOs also impact this supply.

Market Equilibrium: Where Prices Decide Themselves

Equilibrium occurs at the point where demand and supply curves intersect. At this point, the quantity buyers want to purchase equals the quantity sellers want to sell, and the resulting price is considered the “fair” price both parties agree upon.

Importantly, when prices are above equilibrium, excess supply occurs, leading sellers to lower prices to clear inventories. Conversely, when prices are below equilibrium, shortages happen, prompting prices to rise until balance is restored.

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

Demand Factors in the Stock Market

• Money Liquidity: When central banks or governments increase the money supply, investors have more funds to buy stocks, boosting demand.
• Interest Rates: Lower interest rates make stock investments more attractive compared to savings accounts.
• Company Profit Expectations: If analysts forecast higher earnings, demand for that company’s shares increases.

Supply Factors in the Stock Market

• Share Buyback Policies: When companies buy back shares, the supply decreases because fewer shares are available for trading.
• Capital Raising: Issuing new shares increases supply, often exerting downward pressure on prices.
• IPOs: New companies entering the market introduce additional supply, which can temporarily affect market equilibrium.

Applying Supply and Demand in Stock Price Analysis

Fundamental Analysis

When investors say “this stock has increased supply,” they mean more sellers are willing to sell, often due to:

• Poor earnings forecasts
• Company warnings about revenue
• Negative news affecting investor confidence

Conversely, positive earnings forecasts or good news about new projects increase demand, pushing prices higher.

Technical Analysis

Traders use various tools to monitor buying and selling pressures:

1. Candlestick Patterns

• Green candles (Close > Open): Buying pressure dominates, strong demand.
• Red candles (Close < Open): Selling pressure dominates, strong supply.
• Doji (Open ≈ Close): Balance between buying and selling.

2. Support & Resistance Levels

• Support: Price level with strong demand where buyers are willing to buy.
• Resistance: Price level with strong supply where sellers are willing to sell.

3. Market Trends

• Uptrend: Demand outpaces supply, prices make higher highs.
• Downtrend: Supply outpaces demand, prices make lower lows.

Demand Supply Zone: Trading Technique Using Supply and Demand

The Demand Supply Zone technique combines Price Action and market buy/sell strength analysis, identifying points where price previously oscillated out of balance and then formed a base before moving out again.

Reversal Trading Patterns

DBR - Drop Base Rally

• Sellers dominate (strong supply), causing rapid price drops to a support base.
• When good news arrives, buying pressure overcomes, and prices rally.

RBD - Rally Base Drop

• Buyers dominate (strong demand), causing rapid price increases to a resistance base.
• Negative news causes selling to take over, leading to a decline.

Continuation Trading Patterns

RBR - Rally Base Rally

• Strong buying continues; prices rise, form a base, then rise again with improved data.

DBD - Drop Base Drop

• Strong selling; prices fall, form a base, then continue downward with worsening data.

Traders can use these patterns to enter positions at breakout points of the base, setting stop-loss orders outside the base.

Summary: Supply, Demand, and Your Investment

Supply and demand curves, combined with the concepts of demand and supply, are tools that help investors understand why asset prices move. They are not random or mere coincidences but result from the forces of buying and selling interactions in the market.

Both fundamental analysis—focusing on changes in a company’s intrinsic value—and technical analysis—tracking price oscillations—are grounded in the principles of supply, demand, and equilibrium.

Most importantly, understanding this concept will help you view the market more systematically. Instead of feeling that price movements are random, study and apply these theories to real price data to gain experience and a clearer picture.