What causes market prices to fluctuate? Understand what demand and supply mean.

Today, when you see stock or asset prices fluctuate, you might wonder why prices go up or down. Demand and supply refer to the fundamental phenomena that explain how all prices are determined—whether for goods, services, or even financial assets. This concept not only helps economists but also enables investors and traders to better predict price movements and make informed decisions.

First: The Basic Meaning of Demand and Supply

To understand the market, we need to know what drives prices. Demand and supply consist of two sides. The first is demand, which shows the desire to buy, and the second is supply, which indicates the willingness to sell.

The market is like a tug-of-war. When buyers have more power, prices tend to rise. Conversely, when sellers have more power, prices tend to fall. The equilibrium between these two forces determines the actual market price.

Demand and Price – Why Buyers Are the Main Force

Demand is the number of buyers and the quantity they are willing to purchase at various price levels. This relationship is often shown as a demand curve, which usually slopes downward because of the law of demand: as prices increase, the quantity demanded decreases; as prices decrease, demand increases.

This behavior is related to two effects: the income effect—when prices fall, your purchasing power increases, allowing you to buy more—and the substitution effect—when a product becomes cheaper, you are more likely to switch from other goods to this one.

Factors influencing demand go beyond price and include:

• Buyers’ income and fatigue
• Prices of related goods
• Consumer preferences and tastes
• Number and size of market participants
• Expectations about future prices
• External factors such as seasons, government policies, and new technologies

Supply and Market Impact – Seller’s Perspective

While buyers decide what to purchase, sellers make their own decisions. Supply is the quantity of goods or services that sellers are willing to offer at different prices. The supply curve usually slopes upward, opposite to the demand curve.

Law of supply states that higher prices encourage sellers to produce and sell more because the expected profit increases. Conversely, lower prices discourage sales due to reduced profitability.

Factors affecting supply include:

• Production costs and raw materials
• Technology and production efficiency
• Number of competitors in the market
• Prices of alternative products
• Producers’ expectations about future prices
• Environment, tax policies, and access to capital

Market Equilibrium – When Prices Stabilize

Actual market prices are not set by one side alone but occur at the equilibrium point, where the demand and supply curves intersect. At this point, the quantity buyers want matches the quantity sellers want to sell.

When prices are above equilibrium: excess supply occurs, leading to downward pressure on prices.

When prices are below equilibrium: excess demand occurs, pushing prices upward.

This system functions like navigation, constantly adjusting prices back to equilibrium.

In Financial Markets – Factors Driving Demand and Supply

Financial markets are more complex than commodity markets because many interconnected factors influence asset prices.

Demand drivers:

• Macroeconomic conditions such as economic growth, inflation rates, and interest rates
• Liquidity in the financial system (available investment funds)
• Investor confidence in future economic and political stability

Supply drivers:

• Corporate policies (capital raising, share buybacks)
• New companies entering via IPO
• Regulations and stock exchange rules

Trading Smartly – Applying Demand and Supply Zones

Investors and traders don’t always wait for prices to reach new equilibrium points. They look for moments when demand and supply are out of balance, as these are periods of high price movement.

Demand Supply Zone is a technical analysis technique that identifies:

1. Periods of rapid price increase or decrease (showing which side has more power)
2. Areas where prices pause (called bases), indicating demand and supply are balancing
3. Breakout points where prices move out of these bases

Traders use this information to plan their trades.

Four Trading Strategies – From Reversal to Continuation

Reversal Trading

Drop Base Rally (DBR) – Bullish reversal: This pattern starts with a sharp decline (indicating strong selling). Afterward, the price consolidates in a range. When buying pressure returns, the price breaks out upward. Traders can enter at the breakout point with a stop-loss below the base.

Rally Base Drop (RBD) – Bearish reversal: This is the mirror image of DBR. It begins with a rapid rise, followed by consolidation. When selling pressure resumes, the price breaks downward. Traders enter at the breakout with a stop-loss above the base.

Continuation Trading

Rally Base Rally (RBR) – Uptrend continuation: Here, the price rises, consolidates, and then rises again, showing buying strength. Traders wait for a breakout above the consolidation to enter.

Drop Base Drop (DBD) – Downtrend continuation: The price falls, consolidates, and continues downward, indicating persistent selling. Traders wait for a breakdown below the base to enter.

Summary

Demand and supply refer to the fundamental relationship between how much buyers want and how much sellers are willing to offer. This relationship determines the prices of everything—from fresh produce to multi-billion-dollar stocks.

Understanding and applying demand and supply insights help investors better predict price movements, whether through fundamental analysis (studying why demand changes) or technical analysis (observing buying and selling pressures on charts).

If you aim to be a successful investor, studying and mastering this concept is essential.