Demand Supply: The fundamentals investors need to understand for making smart decisions

In stock investing, many people often hear the terms “buying pressure” and “selling pressure,” which are reflections of the economic concept called Demand and Supply. Whether in the real goods market or the financial market, this principle plays a role in determining prices almost every time.

Understanding the Driving Forces of Price in the Financial Market

The stock prices we see today are not just random meaningless numbers but are the result of clashes between two sides.

Buyers (Demand) represent the amount of money and the intent of investors to accumulate that stock. When good news comes in, the company performs well or its operations grow, investors are willing to pay higher prices to acquire shares. Prices then rise.

Sellers (Supply) are the amount of shares investors want to sell. When bad news or concerns arise, they are willing to sell shares at lower prices. Prices then fall sharply.

Importantly, Demand and Supply are not static. Various factors cause them to change constantly. Understanding this helps investors read the market better.

The Fundamental Structure of Demand and Supply

Demand: The willingness to buy

Demand reflects the readiness and willingness of consumers to purchase goods at various prices. If we plot price against the quantity demanded, we get a curve called the Demand Curve — a line sloping downward from left to right.

The Law of Demand states that the relationship between demand and price is inverse: when prices go up, the quantity demanded decreases; conversely, when prices go down, the quantity demanded increases.

Why is this so? There are two reasons:

Income Effect (Income Effect): When prices decrease, your money “becomes more valuable,” leaving you with more to spend on other goods. This enables you to buy more.

Substitution Effect (Substitution Effect): When the price of this good drops relative to others, it appears more attractive, so people tend to buy this instead of other goods.

Other factors influencing demand include: consumers’ income, tastes, the number of consumers, future price expectations, and even psychological factors like confidence.

Supply: The willingness to sell

Supply is the readiness and willingness of sellers to offer goods at various prices. When we plot this data, we get a Supply Curve — a line sloping upward from left to right.

The Law of Supply is the opposite of demand: the willingness to sell correlates directly with price. When prices rise, sellers are willing to sell more because profits increase. When prices fall, they tend to reduce the quantity supplied.

Factors affecting supply include: production costs, prices of alternative goods, technology, the number of competitors, government policies, and weather conditions (for agricultural products).

Equilibrium: The point where prices are set

Demand or supply alone cannot determine the price. It is at the intersection — called Equilibrium — where the price and quantity match.

At this equilibrium point, prices and quantities tend to stabilize because:

• If the price rises above equilibrium, sellers want to sell more, but buyers want to buy less → surplus occurs → prices tend to fall back.
• If the price drops below equilibrium, buyers want to buy more, but sellers want to sell less → shortage occurs → prices tend to rise again.

Applying Demand and Supply in Stock Analysis

In Fundamental Analysis

Stocks are viewed as commodities, so the laws of demand and supply also apply.

When a company has good news, such as improved performance or a new product that wins market favor, the demand to buy its shares increases → higher trading volume → price rises.

Conversely, when bad news emerges, such as disappointing earnings or losses, the demand to sell shares increases → higher selling volume → price drops.

Fundamental factors affecting demand in the financial market include:

• Macroeconomic factors: economic growth, interest rates, inflation → influence investor confidence
• Liquidity: the amount of money in the system → affects buying power
• Confidence: investors’ expectations about future events → influence buying and selling decisions

Supply of stocks in the market is influenced by:

• Company policies (such as capital increases leading to more shares, or share buybacks reducing the number)
• New IPOs increasing the number of shares available
• Regulations like Silent Periods that restrict share sales

In Technical Analysis

Traders use various tools to concretely measure demand and supply.

Candlestick (Candle Stick):

• Green candle (closing price > opening price) = buying pressure wins = strong demand
• Red candle (closing price < opening price) = selling pressure wins = strong supply
• Doji (opening price ≈ closing price) = indecision, unclear trend

Trend (Trend):

• Prices making new highs continuously = demand is strong = uptrend
• Prices making new lows continuously = supply is strong = downtrend
• Prices moving sideways = indecision = unclear

Support & Resistance (Support & Resistance):

• Support = price level where investors are willing to buy = demand waiting
• Resistance = price level where investors are willing to sell = supply waiting

Using Demand Supply Zones to Time Trades

A popular method is using Demand Supply Zones to identify buy/sell opportunities during periods of market imbalance.

Reversal Trading (Reversal)

Case 1: From a downtrend to an uptrend (DBR - Demand Zone Drop Base Rally)

• Step 1: Price plunges sharply, indicating heavy supply
• Step 2: Price stops falling and begins to oscillate within a range, showing selling pressure easing and buying interest returning
• Step 3: When new factors emerge, buying strength resumes, breaking above the range and moving upward → Traders buy at breakout points, setting Stop Loss below the range

Case 2: From an uptrend to a downtrend (RBD - Supply Zone Rally Base Drop)

• Step 1: Price rises strongly, indicating heavy demand
• Step 2: Price halts and oscillates within a range, showing buying pressure easing and selling interest increasing
• Step 3: When new factors emerge, selling pressure intensifies, breaking below the range and falling sharply → Traders sell at breakout points, setting Stop Loss above the range

Trend Following Trading (Continuation)

Case 1: Continuing uptrend (RBR - Demand Zone Rally Base Rally)

• Price rises → forms a range (parrot) → continues upward
• Indicates demand remains strong, merely consolidating to build a base
• Traders can buy again at breakout points of the range

Case 2: Continuing downtrend (DBD - Supply Zone Drop Base Drop)

• Price plunges → forms a range (parrot) → continues downward
• Indicates supply remains strong, consolidating before further decline
• Traders can sell again at breakout points of the range

Key Reminders for Investors

Demand and Supply are not just academic terms; they are the language of the market. If you can read this language, you can understand what is happening in the market.

But like learning any language, reading it once or twice is not enough. You must practice actively — observe real prices, real candlesticks, analyze why prices go up or down.

The more you practice, the better you will be at catching the market’s good timing.