Supply and demand is one of the most fundamental concepts in trading and economics, serving as the backbone for understanding price movements across all markets, whether stocks, forex, commodities, or indices. At its core, supply and demand describe the relationship between the quantity of an asset available (supply) and the desire of traders or investors to own it (demand). Prices fluctuate as these two forces interact—when demand exceeds supply, prices tend to rise; when supply exceeds demand, prices generally fall.

To break it down, supply refers to how much of an asset or security is available for sale at a given price. Demand is how many buyers want to purchase that asset at that price. The equilibrium price is where supply equals demand, and this balance determines the market price. When this balance is disrupted, prices adjust to restore it.

Formula: Price movement ∝ Demand / Supply

This means price movement is proportional to the ratio of demand to supply. If demand increases while supply remains constant, prices rise. Conversely, if supply increases while demand stays steady, prices decline.

A practical example can be found in the stock market. Consider a technology company announcing a breakthrough product. Suddenly, more investors want to buy its shares, increasing demand. If the number of shares available for sale (supply) remains limited, the stock price will rise sharply. On the other hand, if the company issues more shares or insiders sell large blocks, increasing supply, the price may drop unless demand rises accordingly.

In the forex market, supply and demand also play a crucial role. For example, if traders anticipate that a central bank will raise interest rates, demand for that currency may rise, pushing up its price relative to others. However, if the market is flooded with that currency due to increased exports or monetary easing, the supply side may weaken the currency’s value despite demand.

Common misconceptions include thinking that supply and demand are static or that only one side drives price. In reality, both supply and demand are continuously changing, influenced by news, economic data, geopolitical events, and trader sentiment. Another mistake is assuming that high demand always means price will rise indefinitely. Sometimes, prices can become overextended, leading to corrections as traders take profits or new supply enters the market.

Traders often ask related questions such as “How to identify supply and demand zones,” “What causes shifts in supply and demand,” or “How to use supply and demand for entry and exit points.” These inquiries reflect the importance of recognizing key levels on charts where supply overwhelms demand (resistance) or demand overwhelms supply (support), helping traders anticipate potential reversals or continuations.

In summary, understanding supply and demand helps traders comprehend why prices move and how market dynamics operate. It is essential to monitor both sides of the equation and consider external factors that influence them. Successful trading strategies often involve identifying imbalances in supply and demand to capitalize on price moves before the market fully adjusts.