The “Why” of Price Movement: A High-Level Look at Supply, Demand, and the Occasional Chaos
In the world of finance, we like to pretend that price movement is a sophisticated ballet choreographed by complex algorithms and PhD-holding quants. In reality, it’s mostly just a high-stakes game of “Musical Chairs” played by people who have had way too much espresso.
To understand why prices move, we have to look at the two titans of the industry: Supply and Demand—and their chaotic younger sibling, The News.
1. Supply vs. Demand: The Infinite Tug-of-War
At its core, every market is just a digital version of a crowded fish market.
The Law of Demand: When everyone decides they suddenly must have a specific asset (let’s call it “the next big thing”), the price goes up. Why? Because humans are competitive by nature and hate seeing someone else own something they don’t.
The Law of Supply: When the market is flooded with more of an asset than people actually want, the price drops. It’s the economic equivalent of trying to sell a “World’s Best Boss” mug at a convention for people who were just fired.
The Equilibrium: When supply and demand meet, we find a “fair price.” This lasts for approximately four seconds before someone tweets something and ruins the balance.
2. The News: The Ultimate Party Crasher
If Supply and Demand are the logic of the market, News is the emotion. News acts as the catalyst that makes people change their minds about what something is worth.
The “Good” News: A company announces they’ve invented a battery that runs on hopes and dreams. Demand skyrockets because everyone wants a piece of the future. Supply remains fixed. Price goes to the moon.
The “Bad” News: A CEO gets caught doing something questionable on a yacht, or the Fed decides to raise interest rates because the economy is “too spicy.” Demand evaporates. Everyone tries to exit through a door built for one person. Price hits the floor.
3. Sentiment: Why Logic Sometimes Leaves the Building
Occasionally, prices move for no discernible reason other than Market Sentiment. This is when investors collectively decide to act like a flock of birds—one person turns left, and suddenly everyone is flying toward a brick wall. This is how we get “Bubbles” (where things are too expensive) and “Capitulation” (where everyone sells their stocks in a fit of pique).
The Professional Reality Check: > Prices don’t move because of math; they move because of expectations. You aren’t buying what a company is worth today; you’re betting on how much more of a genius (or fool) the next buyer will be tomorrow.
Let’s dive into Market Liquidity, or as I like to call it: "The Art of Not Getting Stuck with a Bag of Rocks in a Room with No Doors."
Market Liquidity: The Grease in the Economic Gears
In financial circles, we talk about “liquidity” as if it’s a high-brow concept. In reality, it’s just a measure of how quickly you can turn your investments into “pizza money” without having to offer a 50% discount to a guy named “Shady Steve” in a dark alley.
1. The “Easy Exit” vs. “The Forever Home”
High Liquidity (The Cash Machine): Imagine you are at a crowded concert and you want to sell a cold bottle of water. There are thousands of thirsty people. You can sell it instantly at the market price. That’s the S&P 500.
Low Liquidity (The Beanie Baby Problem): Imagine you own a rare, hand-knitted sweater for a hairless cat. It’s “worth” $500, but there are only three people in the world who want it, and two of them are currently napping. If you need money now, you’re going to have to sell it for $5. That is a “thin” market.
2. The Bid-Ask Spread: The “Broker’s Tax”
Liquidity is best observed through the Bid-Ask Spread.
The Bid: What the buyer is willing to pay (The “I’m cheap” price).
The Ask: What the seller wants (The “I know what I have” price).
In a liquid market, these two are practically touching. In an illiquid market, the gap is so wide you could drive a freight truck through it. Every time you trade, you’re trying to jump that gap. If the gap is too wide, you’re going to lose a tooth on the landing.
3. Slippage: When Your Order is Too Big for the Room
Slippage is what happens when you try to sell 10,000 shares of a tiny company. You sell the first 100 at $10, but because there are no more buyers at that price, the next 100 sell at $9.90, and the next at $9.50.
By the time you’re done, you haven’t sold for $10—you’ve single-handedly crashed the price because the “pool” of liquidity was actually just a damp puddle.
The Professional Reality Check: > Profit is an opinion; Liquidity is a fact. You can be a “paper millionaire” all day long, but if the market for your asset has the depth of a parking lot puddle, you aren’t actually rich until someone else agrees to hold the bag.
4. Flash Crashes: When the Grease Disappears
Sometimes, liquidity just… leaves. Usually right when you need it most. This is the financial equivalent of everyone at a party deciding to leave at the exact same time through a single cat flap. When liquidity vanishes, prices don’t just fall; they teleport downward.
Technical Analysis: Reading the Tea Leaves of the Market
Technical Analysis is the belief that past price action, volume, and chart patterns can predict future price movements. It’s essentially stock market archaeology: digging through historical data to uncover clues about where prices are heading. While some hail it as a mystical oracle, others view it as akin to astrology for spreadsheets.
1. The Core Idea: History Repeats (Until It Doesn’t)
The fundamental principle of technical analysis is that human psychology and market behavior tend to repeat themselves. Fear, greed, panic, and exuberance leave discernible patterns on a chart. Technical analysts believe that by identifying these patterns, they can anticipate how the crowd will react next.
Support & Resistance: Imagine a price hitting a “floor” (support) and bouncing back up, or hitting a “ceiling” (resistance) and falling back down. These are levels where buying or selling pressure historically takes over. It’s like the market saying, “Nope, not going below this!” or “Enough is enough, we’re not going higher!”
Trends: Prices generally move in trends – up, down, or sideways. Technical analysts try to identify these trends early and ride them like a financial surfer. The mantra: “The trend is your friend… until it suddenly decides you’re an enemy.”
2. Chart Patterns: The Rorschach Test of Finance
This is where it gets artistic. Technical analysts look for specific shapes and formations on charts that supposedly signal future movements.
Head and Shoulders: A pattern said to predict a trend reversal, often looking like a person shrugging their shoulders right before a big fall.
Double Tops/Bottoms: When a price tries to break a level twice and fails, hinting at a reversal. It’s like the market repeatedly knocking on a door and realizing no one’s home.
Triangles, Flags, Pennants: These are “continuation patterns,” suggesting a pause before the existing trend resumes. Imagine the market taking a quick breath before continuing its sprint.
3. Indicators & Oscillators: Adding More Squiggles
Beyond just raw price action, technical analysts use a plethora of mathematical indicators that transform price and volume data into more squiggly lines at the bottom of the chart.
Moving Averages (MAs): These smooth out price data to show the average price over a period. When a short-term MA crosses a long-term MA, it’s often seen as a buy or sell signal – like two roads crossing, indicating a turn.
Relative Strength Index (RSI): This indicator tries to tell you if an asset is “overbought” (too expensive, due for a fall) or “oversold” (too cheap, due for a rise). It’s the market’s internal thermometer, telling you when things are getting too hot or too cold.
MACD (Moving Average Convergence Divergence): A momentum indicator that compares two moving averages to identify potential trend changes. It’s like having a second opinion on the trend’s strength.
The Professional Reality Check: > Technical analysis is less about predicting the future and more about predicting reactions to the future. It’s a tool for managing risk and finding entry/exit points, not a crystal ball. And remember: if a chart pattern guarantees profit, everyone would be rich, and the lines would stop working.
f candlestick charts are the “novel” of the market, then patterns like the Hammer and the Evening Star are the plot twists. They signal that the current trend is exhausted and someone—either the bulls or the bears—is about to stage a coup.
Here are two of the most famous “main character” patterns you need to know.
1. The Hammer: The “I’m Not Dead Yet” Signal
The Hammer is a bullish reversal pattern that appears at the bottom of a downtrend.1 It looks exactly like its name: a small body at the top with a long lower wick.2
The Anatomy: A small body (color doesn’t matter much, but green is better) and a lower wick that is at least twice the size of the body.3
The Story: The market started the day by panicking and selling off hard. But, before the candle closed, buyers rushed in like a SWAT team, pushing the price back up near the open.
The Translation: “We tried to crash, but the buyers said ‘No thank you.'”
Pro Tip: Don’t just buy because you see a hammer. Wait for the next candle to close higher to confirm the “rescue mission” is actually happening.
2. The Evening Star: The “Party’s Over” Signal
The Evening Star is a three-candle bearish reversal pattern that appears at the top of an uptrend.4 It’s the market’s way of saying the sun is setting on your profits.
The Anatomy:
Candle 1: A big, strong green candle (The Optimism).
Candle 2: A tiny candle that gaps up (The Indecision/The Star).
Candle 3: A big red candle that closes well into the body of the first candle (The Reality Check).
The Story: Everyone was happy (Candle 1), then suddenly everyone got confused and hesitant (Candle 2), and finally, the sellers took control and shoved the buyers off the stage (Candle 3).
The Translation: “The hype has officially left the building.”
Pattern Comparison
| Pattern | Appearance | Location | Sentiment |
| Hammer | Small body, long lower wick | Bottom of a downtrend | Bullish (Potential Buy) |
| Evening Star | Big Green → Tiny Star → Big Red | Top of an uptrend | Bearish (Potential Sell) |
Note: Trading patterns in isolation is a great way to donate your money to the market. Always look for other clues—like high trading volume—to make sure the pattern isn’t a “fake-out.”