Demand and Supply: Examples of Applications in the Investment Market

Supply and demand are at the heart of setting the prices of assets in general, whether stocks, commodities, or any securities. Investors who understand this concept can read the market more accurately and predict price movements better. Examples of applying supply and demand are numerous in real markets, from fundamental analysis to technical trading.

Fundamentals of Supply and Demand: How Prices Are Formed

When talking about supply and demand, we refer to the desire to buy and sell in the market. These two forces clash and reach a balance point, which is where prices pause temporarily because of equilibrium.

In economic models, the demand curve always slopes downward—when prices rise, buyers want less. Conversely, the supply curve slopes upward—when prices rise, sellers are willing to supply more. The point where the two curves intersect is the equilibrium, determining the price and quantity that the market will hold until new factors influence it.

Factors Driving Supply and Demand: Why Markets Change

Supply and demand are not static or simple; many factors influence them, such as:

Demand side: Investors’ buying decisions are influenced by interest rates—when rates are low, money is cheap, and people seek returns in the stock market. Confidence levels, news, and earnings forecasts also affect demand, either attracting or pushing away buyers.

Supply side: Public companies may decide to raise capital or buy back shares, directly increasing or decreasing the number of shares in circulation. For example, share buybacks create buying pressure, while capital increases create selling pressure. New IPOs also add to the available securities that investors can choose from.

Examples of Applying Supply and Demand: From Theory to Practice

A clear example of using supply and demand is reading price action on candlestick charts. A green candlestick (closing higher than opening) indicates buying strength during that period. For instance, multiple large green candles in a row suggest strong demand and potential continued upward movement. Conversely, red candles (closing lower than opening) signal heavy selling pressure, with prices likely to decline.

Another example is identifying support and resistance levels. Support is where investors see value and want to buy; if the price drops near this level, buying interest may push the price back up. Resistance is where shareholders or traders want to sell or see the price as too high; as the price approaches this level, selling pressure may cause it to reverse downward.

Demand Supply Zone Technique: Practical Trading Examples

Demand Supply Zones are a technique that applies supply and demand more practically. Traders look for moments when prices move sharply up or down—indicating imbalance—and then pause. There are two main scenarios:

Drop Base Rally (DBR): An example of a reversal upward. Price drops sharply due to strong selling (e.g., bad news or profit-taking), then consolidates as selling pressure eases. When buying resumes strongly, the price breaks above the consolidation and continues higher. Traders enter on the breakout.

Rally Base Drop (RBD): An example of a reversal downward. Price rises sharply due to strong buying, then consolidates as buying pressure wanes. When sellers regain control, the price breaks below the support and continues downward.

Beyond reversals, trend-following setups include patterns like RBR (Rally Base Rally)—price rises, pauses, then rises again—or DBD (Drop Base Drop)—price falls, pauses, then falls further.

Summary: How Supply and Demand Improve Investment Decisions

Understanding supply and demand doesn’t guarantee profits but provides a solid foundation. Daily market activities—reading candlesticks, forecasting earnings, or trading with Demand Supply Zones—all revolve around observing who wants to buy or sell at any given moment. Success depends on study, practice, and analyzing real market examples to gain deeper experience.