Demand and supply cause stock prices to move. A comprehensive guide for traders to understand

If you’ve ever wondered why stock prices don’t go down or sometimes can’t be pushed up, it’s because the buying and selling forces in the market are fighting each other. The concept of demand and supply is the key to understanding what is happening in the financial markets and how to use it to profit from stock trading.

What exactly is Demand and Supply?

Demand and supply are actually very natural aspects of trading any goods, including stocks. When more people want to buy, prices go up. When more people want to sell, prices go down. It’s as simple as that—that’s demand and supply.

This brief understanding is correct, but to fully utilize it, we need to dig deeper and understand the meaning of these terms more thoroughly.

###Demand( - The buying force present in the market

Demand refers to the number of buyers and the quantity of stocks they want to purchase at various price levels. When plotted, this creates a “demand curve” that slopes downward, indicating that the lower the price, the more buyers want to buy.

Law of Demand states simply that price and the quantity consumers want to buy have an inverse relationship. )Inverse Relationship( This phenomenon arises from two factors:

First, Income Effect - When prices fall, the remaining money in your wallet effectively increases, allowing you to buy more.

Second, Substitution Effect - If this stock’s price drops below others, you might abandon other stocks and switch to buy this one instead.

Besides price, other factors affecting demand include:

• Company earnings )Earnings(
• Market confidence
• General news
• Number of investors in the market
• Interest rates of financial institutions

)Supply### - The selling force waiting in the market

Supply refers to the number of sellers and the quantity of stocks they want to offer at various price levels. When plotted, this creates an “supply curve” that slopes upward, indicating that higher prices motivate more sellers to sell.

Law of Supply states that price and the quantity offered by sellers are directly related. (Direct Relationship) Higher price → more willing sellers; Lower price → fewer sellers.

Other variables affecting supply include:

• Production costs
• Number of competing companies
• Tax policies and price controls
• New technologies
• Future price expectations
• Natural disasters or external factors

(Price Equilibrium) - The market’s satisfaction point

Having only buying or only selling forces isn’t enough; prices will keep fluctuating. The real answer lies at the “equilibrium” point—where demand and supply curves intersect.

At this point:

• Buyers are willing to pay this price
• Sellers are willing to sell at this price
• The quantity demanded equals the quantity supplied

If the price is above this point, excess goods exist, and sellers must lower prices. If below, goods are scarce, and buyers want prices to rise.

Prices will oscillate around this point until new factors shift the balance.

In financial markets, demand and supply are more complex than this simple explanation

###Where does the buying power in financial markets come from?

When interest rates are low, people tend to invest more in stocks because keeping money in banks yields less return.

When financial system liquidity increases, investors have more cash available, which boosts buying power.

When market confidence is high, based on news that the economy will grow, people feel more confident and buy stocks.

(Where does the selling power in financial markets come from?

When companies conduct IPOs or raise capital, the number of shares in the market increases, which is part of the new supply.

When major shareholders want to sell, as permitted by regulations )e.g., during the end of Silent Period###, supply in the market increases.

When economic news is bad, people fear economic downturns and rush to avoid investments. These factors cause demand and supply to interact in complex ways, interconnected. It’s understandable why market analysis by experts is often so complicated.

Use demand and supply to analyze stock trading

Fundamental analysis: Assessing the true value of a company

When buying pressure is strong, stock prices rise. When selling pressure is strong, prices fall. But in reality, these movements are driven by changing expectations and company performance.

If news indicates the company will increase profits, investors want to (Strong Buying). If news suggests profits will decline, investors want to ###Strong Selling(.

Factors influencing these expectations include:

• Quarterly earnings
• Economic growth forecasts
• Changes in business structure
• Profitability potential

) Technical analysis: Reading the language of prices

Various technical analysis methods help reveal hidden demand and supply in the numbers, such as:

1. Candlestick patterns (Candlestick) tell the story of the battle between buying and selling forces:

• Green candle = buying wins; close > open
• Red candle = selling wins; close < open
• Doji ###Doji( = indecision; neither side has dominance

2. Support & Resistance levels are points where buying and selling forces converge:

• Support )Support( = price level where investors want to buy; price tends to bounce back up
• Resistance )Resistance( = price level where investors want to sell; price tends to fall back down

3. Trends indicate which side has more strength:

• Uptrend = buying wins; making new highs
• Downtrend = selling wins; making new lows
• Sideways = indecision; no clear winner

Demand and Supply Zone Technique - The real way to time trades

Many traders apply the Demand Supply Zone technique, which is a practical application of demand and supply principles in the market.

Simple idea: prices move rapidly due to “excess” demand or supply, then pause as opposing forces meet. When one side wins, the price breaks out and continues the trend.

) Case 1: Price drops then rebounds (Demand Zone Drop Base Rally)

1. Price plunges rapidly (Drop) — indicating strong selling pressure
2. Price consolidates in a range (Base) — sellers tire out, buyers step in
3. Price reverses upward ###Rally( — buying wins

Traders can buy when the price breaks above the range, setting a stop loss below the range.

) Case 2: Price rises then reverses downward (Supply Zone Rally Base Drop)

1. Price surges rapidly (Rally) — indicating strong buying pressure
2. Price consolidates in a range (Base) — buyers tire out, sellers step in
3. Price reverses downward ###Drop( — selling wins

Traders can sell when the price breaks below the range, setting a stop loss above the range.

) Case 3: Price continues rising after a rally (Rally Base Rally)

1. Price rises (Rally) — strong buying
2. Price consolidates (Base) — sellers want to sell, buying slows
3. Price continues upward ###Rally( — buying strength returns

Traders can add to positions when the price breaks above the consolidation range.

) Case 4: Price drops then continues downward (Drop Base Drop)

1. Price declines (Drop) — strong selling
2. Price consolidates (Base) — buyers want in, selling slows
3. Price continues downward ###Drop( — selling strength resumes

Traders can add to short positions when the price breaks below the range.

Summary: Is demand and supply analysis practical?

Demand and supply is not just a theoretical economic concept in textbooks; it’s the foundation of real market price movements. Economists, investors, and traders all use these principles.

The challenge lies in training oneself to see demand and supply lines in the constantly fluctuating price charts. It’s not about imagination but about observation and continuous learning from real market data.

The key is ongoing study: practicing support and resistance, recognizing market patterns, and most importantly, starting with small amounts of money and gradually increasing as confidence builds through practice.