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Supply and Demand Made Easy!

Imagine you have a toy store and you’re selling a super popular toy robot.

Supply: You only have 10 toy robots in your store. This is like the “supply” in the financial market, which is the amount of something available.

Demand: Now, imagine 50 kids want to buy your toy robot. This is the “demand”, meaning how many people want to buy something.

Because so many kids want the robot but there are only a few available, the price of the toy robot might go up. If you had 100 toy robots and only 10 kids wanted them, the price might go down to make them more appealing.

In financial markets, when there’s a lot of demand for a stock (or share of a company) and not much supply, the price goes up. If there’s low demand and a lot of supply, the price goes down. Just like with the toy robot!

Next time you see a crypto or stock drop drastically, that doesn’t mean something is wrong. There may be low liquidity. Even a run-up in crypto is typically an abundance of buying pressure followed by not enough traders entering the market to sustain a parabolic move.

So, what does this mean as a contrarian? It means we should be loading when markets are bleeding.

Remember, we don’t save for a rainy day -- we save for a bloody day.


Written by Eric White

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