Understanding the meaning of demand and supply - reasons why traders need to know

If you are an investor in the stock market, the terms Demand and Supply might sound like distant economic concepts, but in reality, these ideas explain how prices go up or down, and you can use them to time your buy and sell decisions.

Meaning of Demand and Supply - Simple Explanation

Forget about economics textbooks for now. Think of it simply as:

Demand = The side of buyers wanting to purchase stocks at various prices
Supply = The side of sellers wanting to sell stocks at various prices

When more buyers are present, prices go up. When more sellers are present, prices go down. That’s it.

Why do stock prices change?

First rule: Law of Demand - Low prices → more people want to buy, high prices → fewer people want to buy

Second rule: Law of Supply - High prices → more people want to sell, low prices → fewer people want to sell

The reasons are twofold:

• Income effect: Lower prices = more purchasing power = buy more
• Substitution effect: Lower prices = cheaper than other goods = switch to buy this one

One thing traders should know - Equilibrium

Equilibrium is the point where demand and supply curves intersect. This is the “natural” price the market agrees upon.

If the price rises above equilibrium → sellers see opportunity and sell → price drops back to equilibrium

If the price falls below equilibrium → buyers see it as cheap and buy → price rises back to equilibrium

What factors influence buying demand?

In the financial markets, many things affect demand:

• Macroeconomic conditions: Inflation rates, interest rate changes = investors shift from bonds to stocks
• System liquidity: More money flowing into the market = more stock buying
• Confidence: Good news = investors want to buy, bad news = investors want to sell

What factors influence selling supply?

Where does the supply in the Thai stock market come from:

• Company decisions: Issuing new shares = increased supply, buybacks = decreased supply
• New IPOs: New companies entering = more new shares in the market
• Regulations: Restrictions like (Silent Period) or government incentives to sell

How do traders use demand and supply?

When you look at a (Candlestick):

Green candle (Close > Open) = Buying pressure wins = Strong demand

Red candle (Close < Open) = Selling pressure wins = Strong supply

Doji (Open ≈ Close) = Both sides are balanced = Unclear

Analyzing trends (Trend):

• If prices make new highs = buying strength dominates = Uptrend
• If prices make new lows = selling strength dominates = Downtrend
• If prices fluctuate within a range = equilibrium = Wait for new signals

How to use Demand Supply Zones - How to apply

Many traders use the Demand Supply Zone technique to catch timing:

Reversal Patterns (Reversal)

Demand Zone DBR (Drop-Base-Rally):

• Price drops sharply = strong selling
• Consolidates in a range = both sides battling
• Price rebounds = buying strength wins
• Enter trades at breakout above the top of the range

Supply Zone RBD (Rally-Base-Drop):

• Price rises = strong buying
• Consolidates in a range = both sides battling
• Price drops = selling strength wins
• Enter trades at breakout below the bottom of the range

Continuation Patterns (Continuation)

Demand Zone RBR (Rally-Base-Rally):

• Price rises, consolidates, rises again = uptrend continuation
• Trade in line with the trend

Supply Zone DBD (Drop-Base-Drop):

• Price drops, consolidates, drops again = downtrend continuation
• Trade in line with the trend

Summary: Demand and Supply in investing

Demand and Supply are not just economic theories for exams; they are tools traders use daily to understand what the market might do next.

When you understand:

• Where buying strength is
• Where selling strength is
• Where the market is in balance

You can infer where prices are headed, and that’s the secret to timing your trades.

Start by observing candlesticks and support/resistance levels. Practice often, and you’ll develop a clearer picture over time.