Understanding Supply and Demand - The Key to Asset Price Forecasting

For investors or those interested in entering the stock market, understanding the concepts of demand and supply is an essential foundation. This idea is not only the basis of economic science but also a tool that helps investors explain, predict, and accurately time price changes in the market.

Why Investors Need to Understand Demand and Supply

Price movements of assets, whether stocks, bonds, or other financial instruments, mostly result from the competition between two parties: buyers and sellers. The concepts of demand and supply are tools that allow investors to see the overall picture of this confrontation more clearly.

What is Demand - The Buying Desire That Affects Price

Demand reflects the desire to buy goods or services at various price levels. When viewed graphically, demand is represented by a demand curve showing the relationship between price and the quantity consumers or investors want. Each point on this curve indicates the quantity desired at a specific price, or conversely, the maximum price a buyer is willing to pay for a certain amount of goods.

Basic Principles of Demand

The relationship between the quantity and price of demand is always inverse. When prices rise, demand decreases; when prices fall, demand increases. This phenomenon results from two effects:

Income Effect - When prices drop, the real value of money increases, allowing buyers to purchase more goods at the same amount of money.

Substitution Effect - When prices decrease, the good becomes cheaper relative to substitutes, prompting consumers to switch from other products to this one.

Factors Influencing Demand

Besides price, other factors affect demand, such as:

• Consumer income
• Prices of related goods
• Tastes and changing preferences
• Number of consumers in the market
• Future price expectations
• Seasons and humanitarian factors
• Government policies
• Consumer confidence

What is Supply - The Willingness to Sell That Changes the Market

Supply indicates the quantity of goods that sellers or producers are willing to offer at various price levels. Graphically, supply is represented by a supply curve showing the relationship between price and the quantity sellers want to offer. Each point on this curve indicates the quantity supplied at a specific price or the lowest price sellers are willing to accept to sell a certain amount.

Basic Principles of Supply

The relationship between the quantity and price of supply is always direct. When prices increase, sellers want to sell more to gain higher profits; when prices decrease, they prefer to sell less to avoid lower profits.

Factors Influencing Supply

Factors affecting sellers’ decisions include:

• Production costs
• Prices of other goods that can be produced
• Number of competitors
• Technology level
• Future price expectations
• Weather and natural disasters
• Tax policies
• Access to funding

Market Equilibrium - When Prices Stop Changing

Demand or supply alone cannot determine the market price. The actual accepted price by buyers and sellers occurs at the point where demand and supply curves intersect, called the equilibrium point.

At this point, prices and quantities tend to remain stable because:

• When prices are above equilibrium, sellers want to sell more, but buyers want to buy less, leading to excess supply, which pushes prices down toward equilibrium.
• When prices are below equilibrium, buyers want to buy more, but sellers want to sell less, leading to shortages, which push prices up toward equilibrium.

Therefore, both demand and supply are key drivers in setting prices and trading volumes in the market.

Factors Driving Demand and Supply in Financial Markets

In money and capital markets, the relationship between demand and supply is complex and interconnected. Understanding these factors helps investors analyze the market more effectively.

Factors Driving Demand

Macroeconomic Conditions - Economic growth, inflation rates, and interest rates influence investment demand. Low interest rates make stocks more attractive for returns.

Financial System Liquidity - Increased money supply in the system enhances liquidity, encouraging investment in risk assets.

Investor Confidence - Expectations about future economic conditions, corporate earnings, or political stability affect investment decisions.

Factors Driving Supply

Corporate Policies - Stock buybacks reduce the number of shares in circulation; capital increases (new issuance) add to supply.

New Listings - IPOs increase the supply of securities.

Market Regulations - Rules like the Silent Period can restrict major shareholders from selling shares immediately after IPO.

Applying Price Analysis Processes

Demand and supply are not only used in general economic analysis but also effectively applied in stock market analysis, both in fundamental and technical analysis.

Application in Fundamental Analysis

Price changes result from shifts in demand and supply. When prices fall, it indicates increased selling pressure; when prices rise, it indicates increased buying interest.

Fundamentally, these changes are driven not by the intrinsic content of the stock but by revised expectations of earnings and company valuation. For example:

• Changes in quarterly earnings forecasts
• Overall economic outlook
• Structural changes within the company

When data suggests growth prospects, buyers are willing to pay higher prices, and sellers hold back, pushing prices up. Conversely, negative data causes buyers to hesitate and sellers to accelerate sales, lowering prices.

Application in Technical Analysis

Technical analysis uses tools combining price and volume to infer buying and selling strength, helping forecast future prices:

Candlestick Analysis - Green candles (close higher than open) indicate strong buying; red candles (close lower than open) indicate strong selling. Doji candles (open and close at the same price) show indecision.

Trend Analysis - Higher highs suggest strong buying momentum; lower lows indicate strong selling. Range-bound movement shows balance.

Support & Resistance - Support levels are price points where investors see buying opportunities; resistance levels are points where selling interest is high.

Demand and Supply Zone Techniques for Trading Timing

Demand and supply zones are popular methods to identify when the market is out of balance, moving rapidly up or down, then seeking a new equilibrium. During these phases, prices may consolidate or oscillate within a range. When new factors emerge, prices break out of these ranges and continue trending until a new balance is found.

Reversal Trading

Demand Zone Drop Base Rally (DBR) - Bullish Reversal - Occurs when selling pressure dominates, causing rapid price drops, followed by consolidation as buying interest increases. When new positive factors appear, prices break above the zone and trend upward. Traders can enter on breakouts with stop-losses below the zone.

Supply Zone Rally Base Drop (RBD) - Bearish Reversal - Happens when buying pressure dominates, causing rapid price increases, followed by consolidation. When new negative factors emerge, prices break below the zone and trend downward. Entry is on breakouts with stop-losses above the zone.

Trend Continuation Trading

Rally Base Rally (RBR) in Demand Zones - Uptrend continuation - When buying momentum pushes prices higher, then consolidates, and new positive factors strengthen buying again, breaking resistance and continuing upward.

Drop Base Drop (DBD) in Supply Zones - Downtrend continuation - When selling momentum drives prices lower, then consolidates, and new negative factors strengthen selling again, breaking support and continuing downward.

Practical Examples of Using Demand and Supply Concepts

Identifying Buying and Selling Pressure from Candlesticks

Large bullish candles (green) indicate strong buying pressure; large bearish candles (red) indicate strong selling. Doji candles suggest indecision.

Monitoring Price Trends

Consistently making new highs indicates strong buying interest; new lows suggest strong selling pressure.

Applying Demand and Supply to Real Events

When a company reports better-than-expected earnings, investors revise their expectations upward. Buyers are willing to pay higher prices, and sellers hold back, pushing prices higher. Conversely, negative news causes buyers to hesitate and sellers to accelerate sales, lowering prices.

Summary

Demand and supply are not only fundamental economic concepts but also powerful tools for investors and traders to predict prices accurately. Proper understanding and application of these concepts enable better decision-making and timing in investments. Continuous study and practice in applying demand and supply analysis to real market data are key to successful trading.