Viewing the stock market through the lens of supply and demand: From theory to practical trading

If you’ve ever wondered how stock prices move, what factors drive trading, and why prices rise and fall so clearly, the answer lies in the classic economic concept: Demand and Supply.

Although this principle has been around for centuries, it remains the main mechanism explaining movements in financial markets. For traders aiming to execute precise trades, understanding this mechanism is essential.

The Origin of Demand and Supply: The Science Behind Price Setting

(Demand) is what? Simply put: it is the desire to buy goods or services at various price levels. When plotted on a graph, it forms the Demand Curve(. Each point on this curve shows the quantity buyers want at a specific price.

)Supply( is similar: it is the desire to sell goods or services at various price levels. When plotted, it creates the Supply Curve), indicating the quantity sellers are willing to sell at a certain price.

( The Law of Demand: Inverse Relationship

The law of demand tells us: demand is inversely related to price, meaning:

• Price increases → demand decreases
• Price decreases → demand increases

Part of this is due to the Income Effect): when prices fall, consumers’ purchasing power increases, allowing them to buy more.

Another part is the Substitution Effect###: when prices drop, consumers are willing to substitute other goods for this one because it seems more cost-effective.

( The Law of Supply: Direct Relationship

The law of supply indicates: the willingness to sell is directly related to price, meaning:

• Price increases → sellers want to sell more
• Price decreases → sellers want to sell less

The simple reason: sellers seek higher profits; higher prices motivate more selling.

When Demand and Supply Meet: Equilibrium Point )

Equilibrium occurs where the demand curve intersects with the supply curve. At this point:

• Quantity demanded = Quantity supplied
• The resulting price is called the “equilibrium price”

Why do prices tend to settle at this point?

If the price is above equilibrium: sellers want to sell more, but buyers want to buy less → surplus → sellers lower prices → price returns to equilibrium.

If the price is below equilibrium: buyers want to buy more, but sellers want to sell less → shortage → sellers raise prices → price returns to equilibrium.

Demand and Supply in the Stock Market: Why Do Stocks Rise and Fall?

Stocks are also commodities, albeit special ones. Therefore, the laws of demand and supply apply to stocks as well.

( The Origin of Demand in the Stock Market

Macroeconomic Factors:

• Low interest rates → investors seek higher returns → increased demand for stocks
• Economic growth → better corporate performance → increased buying interest

Market Liquidity: More money in the system → more funds flowing into the stock market → prices rise

Investor Confidence: Good news → positive market outlook → strong buying demand

) The Origin of Supply in the Stock Market

Corporate Policies:

• Stock buybacks → reduce the number of shares in circulation → supply decreases → prices rise
• Capital increases → more shares issued → supply increases → prices fall

New IPOs: New companies entering the market → offering shares → supply increases

Debt Policies: Major shareholders sell shares to cash out → supply increases → prices fall

Analyzing Demand and Supply for Trading

1. Through Candlestick Analysis(

Green Candlestick )Close > Open###: Demand or buying pressure is strong → price moves up

Red Candlestick ###Close < Open###: Supply or selling pressure is strong → price moves down

Doji Candlestick (Open ≈ Close): Demand and supply are in balance → no clear direction → wait for next signals

( 2. Through Market Trends)

Uptrend (Higher High, Higher Low): Demand wins → prices gradually rise

Downtrend (Lower High, Lower Low): Supply wins → prices gradually fall

No Clear Trend ###Sideways(: Demand and supply are balanced → sideways movement

) 3. Through Support & Resistance(

Support )Support Level(: Price level where demand )Buyers( are waiting → price should not fall below this

Resistance )Resistance Level###: Price level where supply (Sellers) are waiting → price should not go above this

Demand and Supply Zone Techniques: Trading Systems Linked to Demand and Supply

This is a popular technique that uses demand and supply to time trades.

( Pattern 1: Demand Zone Drop Base Rally )DBR( - Uptrend from a downtrend

Scenario: Price drops sharply )Drop( due to excess selling → then forms a base )Base( → finally recovers )Rally###

What Happens: When the price hits a certain point, buyers see an opportunity → demand surges → selling stops → price moves up

Trading Method: Buy at the breakout above the base

( Pattern 2: Supply Zone Rally Base Drop )RBD( - Downtrend from an uptrend

Scenario: Price rises rapidly )Rally( due to excess buying → then forms a base )Base( → finally drops )Drop###

What Happens: When the price reaches a certain point, sellers see an opportunity → supply surges → buying stops → price drops

Trading Method: Sell at the breakout below the base

( Pattern 3: Rally Base Rally )RBR( - Continuous uptrend

Scenario: Price rises )Rally( → forms a base )Base( due to sellers → continues rising )Rally###

What Happens: Demand remains strong while supply is temporary; when buying resumes, price breaks previous resistance

Trading Method: Buy at the breakout above resistance

( Pattern 4: Drop Base Drop )DBD( - Continuous downtrend

Scenario: Price drops )Drop( → forms a base )Base( due to buyers → continues dropping )Drop###

What Happens: Supply remains strong while demand is temporary; when selling resumes, price breaks previous support

Trading Method: Sell at the breakout below support

Practical Steps: From Theory to Actual Trading

1. Observe Candlesticks: Strong green = strong demand; strong red = strong supply

2. Check Trend: If higher highs continue = demand wins, uptrend persists

3. Identify Support & Resistance: Support = demand zone; Resistance = supply zone

4. Wait for Breakouts: When price breaks support/resistance = signal of a change in momentum

5. Set Stop Loss: At the point where the base formation ends = where demand and supply are believed to shift

Summary

Demand and Supply are not just textbook concepts but real driving forces behind stock price movements. When you understand how buying and selling interests work, you can read the market better and trade more effectively.

However, theory alone isn’t enough; practice by observing trading volume, candlesticks, analyzing trends—more practice makes perfect. Developing market intuition takes time and experience.