Supply Rules: How to Understand and Apply Them in Stock Trading

In the investment world, the roles of demand and supply are fundamental because they are the main mechanisms driving price changes across all markets, whether stock markets, commodity markets, or other financial markets.

If you can understand how the laws of supply work and their effects on financial markets, you will have valuable information to better predict price directions and make more effective investment decisions.

Basic Understanding: What Are Demand and Supply?

Before delving into the laws of supply, we need to understand how demand and supply differ.

Demand (Demand) - The desire to purchase

Demand refers to the quantity of goods or services that consumers want to buy at various price levels. When plotted on a graph, the relationship between price and quantity produces the (Demand Curve), which slopes downward from left to right.

The key point to understand is that as prices decrease, demand tends to increase, while higher prices lead to lower demand. This inverse relationship is called the law of demand.

Factors influencing demand include consumer income, tastes and preferences, future price expectations, the number of buyers in the market, and the prices of related goods.

Supply (Supply) - The desire to sell

Conversely, supply refers to the quantity of goods or services that producers or sellers are willing to offer at various price levels. When plotted, the (Supply Curve) slopes upward from left to right.

This ratio indicates that higher prices motivate sellers to supply more, as they can earn greater profits. Conversely, lower prices lead to reduced supply. This fundamental principle is known as the law of supply.

Factors affecting supply include production costs, technological levels, input prices, the number of producers, future price expectations, and tax policies that may influence costs.

Market Equilibrium: The Intersection of Demand and Supply

The actual market price occurs at the point where the demand and supply curves intersect, called the equilibrium (Equilibrium).

At this equilibrium point, price and quantity are stable because:

• If the price rises above equilibrium, sellers are willing to supply more, but buyers will purchase less, leading to excess supply, which pressures prices downward back toward equilibrium.

• If the price falls below equilibrium, buyers want to buy more, but sellers will reduce supply, resulting in shortages, which push prices upward toward equilibrium.

This automatic market mechanism seeks to find balance.

The Law of Supply: Key Characteristics and Applications

The law of supply states that producers are willing to offer more goods for sale as prices increase. This concept stems from economic reality: higher prices mean higher profits, motivating producers to increase production and supply.

This principle is also relevant in financial markets. When stock prices rise, existing shareholders who are in profit may be willing to sell some shares. Meanwhile, companies might consider issuing new shares to raise capital. Both actions increase the (Supply of shares) in the market.

Factors Affecting Supply in Financial Markets

Beyond price levels, other factors can influence supply, all of which impact market movements:

Cost and Technology Factors

Lower production costs increase supply because producers can produce more at the same price. Conversely, higher costs may lead to reduced supply.

Government policies, such as taxation, increased tax rates, or regulatory requirements, also affect supply.

Corporate Policy Factors

When a company decides to buy back its shares, the total shares in the market decrease, reducing supply. Conversely, issuing new shares increases supply.

Expectations and Confidence Factors

If sellers anticipate prices will rise further, they may temporarily halt sales (reducing supply) to wait for better prices. Similarly, investor confidence or news about declining interest can influence selling behavior.

Demand and Supply in Technical Analysis

Many traders incorporate demand and supply concepts into technical analysis.

Candlestick Analysis (

Green candlesticks )closing higher than opening( reflect strong demand, indicating buyers can push prices higher during that period. Red candlesticks )closing lower than opening( show supply dominance, with sellers successfully pushing prices down.

Doji candlesticks )opening and closing at similar levels( suggest a balance between buyers and sellers, often leading to little price change.

) Trend Following ###

If prices continue to make new highs, it indicates strong demand, with buyers willing to pay higher prices. Conversely, if prices make new lows consecutively, it suggests supply is dominant, and sellers are pushing prices down.

( Support and Resistance )

Support ###is a price zone where demand accumulates; buyers are eager to purchase because they see the price as fair and attractive.

Resistance (is a zone where supply gathers; sellers are willing to sell because they perceive the price as high.

Demand and Supply Zone Trading Techniques

Many traders use the Demand Supply Zone technique to identify entry and exit points. The idea is to find areas where the price previously moved strongly or reversed sharply, and when the price revisits these zones, it may signal a good entry or exit.

) Reversal Trading (

DBR )Demand Zone Drop Base Rally( - Price drops due to excess supply, forms a base, then when demand recovers, price bounces up. Traders buy at the breakout of the upward move.

RBD )Rally Base Drop### - Price rises from strong demand, forms a base, then when supply returns, price breaks downward. Traders can short at the breakdown.

( Continuation Trading )

RBR (Rally Base Rally) - Price continues to bounce upward with pauses, indicating demand remains strong. Suitable for traders who buy on pullbacks.

DBD (Drop Base Drop) - Price declines with pauses, indicating supply remains strong. Suitable for selling on pullbacks.

Summary

Understanding demand and supply, especially the law of supply, is fundamental for investors and traders. Recognizing which forces are strong or weakening in the market helps you make smarter buy or sell decisions.

However, knowledge alone is not enough. It must be combined with practical training, market observation, and keeping trading records to improve your skills continuously. Remember, markets are complex; demand and supply are just one factor. Multi-dimensional analysis and good risk management are crucial.