Why do investors need to understand the relationship between demand and product prices?

When it comes to investing in the stock market, the terms “demand” and “supply” often appear regularly. However, many investors may still not understand how these basic economic concepts can be leveraged to forecast stock prices and make investment decisions.

What is the relationship between demand and the price of goods? Studying this not only helps to understand the market’s operating mechanisms but also leads to the development of more effective trading strategies.

Step 1: Understand the simple market equation

Every time stock prices change, whether up or down, there are generally two forces fighting behind the scenes: the force of buyers (demand) and the force of sellers (supply).

Demand is the quantity of goods that buyers want at various price levels. When plotted on a graph, the relationship between quantity and price is shown as a (Demand Curve) that slopes downward from left to right, reflecting the basic rule: when prices are high, people want to buy less; when prices are low, people want to buy more.

Supply is the opposite: the quantity of goods that sellers are willing to offer at various price levels. The (Supply Curve) slopes upward from left to right, indicating that: when prices are high, sellers want to sell more; when prices are low, sellers want to sell less.

Step 2: Find the equilibrium point (Equilibrium Point)

The most critical point occurs where the demand and supply lines intersect. This is called the “equilibrium.” The resulting price and quantity will be stable.

Why is it stable? Because if the price increases from equilibrium:

• Sellers want to sell more
• Buyers want to buy less
• Excess goods appear in the market
• The price is forced down to sell the remaining goods

Conversely, if the price decreases from equilibrium:

• Buyers want to buy more
• Sellers want to sell less
• A shortage of goods occurs
• The price is forced up to balance supply and demand

Important information: Factors driving demand and supply in financial markets

Factors affecting demand

Macroeconomic conditions: When the economy expands and interest rates are low, investors increase stock purchases, boosting demand.

Liquidity: A high amount of money in the system allows investors to invest more.

Confidence: Investors’ expectations about future conditions. Good news attracts buying interest; bad news causes people to reduce holdings.

Factors affecting supply

Corporate policies: Increasing capital raises the number of shares; share buybacks reduce the number of shares.

Entering new markets: New companies going public (IPO) add supply to the market.

Regulations and controls: Conditions set by stock exchanges affect the ability to offer securities.

Applying these principles to fundamental analysis

Stocks and financial assets are commodities, so the laws of demand and supply can be applied.

When stock prices rise, it reflects that the forces of buyers are winning over sellers. From a fundamental perspective, this is often because:

• The company is likely to grow well
• Profits are expected to increase
• Positive news about core business

Conversely, when prices fall, it indicates that supply or selling pressure is dominant, usually due to negative expectations or concerns about future performance.

Technical analysis: viewing demand and supply through price and volume

1. Candlestick Analysis(

Green candlestick )closing price higher than opening price( indicates stronger demand than supply. Buyers can push prices higher.

Red candlestick )closing price lower than opening price( indicates stronger supply. Sellers are controlling the market.

Doji candlestick )opening and closing prices are close( signifies a balance between demand and supply. The price is in a state of indecision.

) 2. Trend Tracking###

If prices continuously make new highs, it reflects strong demand.

If prices continuously make new lows, it indicates supply dominates the market.

If prices move within a narrow range without breaking up or down, it shows both forces are balanced.

( 3. Identifying support and resistance)

Support is a price level where demand is waiting to buy. Some investors see the price as low enough and want to buy.

Resistance is a price level where supply is waiting to sell. Investors see the price as high enough and want to sell.

Demand and supply zone trading strategies

A popular strategy based on these principles is the Demand Supply Zone, which looks for periods where the price is out of balance and attempts to find a new equilibrium.

Pattern 1: Demand Zone Drop Base Rally (DBR)

Caused by excess supply, leading to a price drop ###Drop(. The initial buy-back is strong, and the price consolidates in a )Base(. When new information arrives, buying pressure wins, breaking the range upward, and the price rallies )Rally(.

Traders can enter buy positions at the breakout point of the range, setting stop-loss below the base.

) Pattern 2: Supply Zone Rally Base Drop (RBD)

Caused by excess demand, leading to a price increase ###Rally(. When selling pressure returns strongly, the price consolidates in a )Base(. When new information arrives, selling pressure wins, breaking the range downward, and the price drops )Drop(.

Traders can enter sell positions at the breakout point of the range, setting stop-loss above the base.

) Pattern 3: Rally Base Rally (RBR) - Continuing uptrend

After a strong upward move ###Rally(, buying momentum diminishes, causing consolidation in a )Base(. When good news arrives, buying pressure wins again, and the price continues upward )Rally(.

Traders can follow the uptrend for further buying opportunities.

) Pattern 4: Drop Base Drop (DBD) - Continuing downtrend

After a sharp decline ###Drop(, a small buying interest appears, causing consolidation in a )Base(. When bad news arrives, selling pressure dominates, and the price continues to fall )Drop(.

Traders can follow the downtrend for further selling opportunities.

Summary: Why is this understanding important?

Demand and supply are not just concepts for economists; they are powerful tools for investors to understand how markets work.

The relationship between demand and the price of goods, in this case, stocks, can help you:

• Forecast price movements more accurately
• Identify good entry and exit points for trading
• Understand why prices go up or down
• Develop strategies based on economic principles

Ultimately, success in investing depends on continuous learning and testing these principles with real market data. The more you observe actual prices, the deeper your understanding of the market will become.