Understanding Supply and Demand for Profit in the Stock Market: A Modern Investor's Guide

What is the goal of studying demand, and why should Thai investors pay attention to this fundamental principle? The answer is forecasting stock price directions in the market.

Before discussing the theory, let’s look at a real example first.

Suppose you see a stock rising rapidly. Then, a clash occurs between buyers and sellers, causing the price to fluctuate within a range. When good news comes in, buyers regain strength, and the price breaks through, continuing to rise. This is how “supply and demand” actually work in the market.

Demand and supply: Not just difficult words to understand

Demand is the desire to buy. When the price drops, the desire to buy increases (because it’s cheaper and I want to buy). Conversely, when the price rises, the desire to buy decreases (because it’s expensive and I don’t want to buy).

Supply is the willingness to sell. When the price rises, sellers are happy to sell (getting a good price). When the price drops, sellers are less willing to sell (because it’s not worth it).

The equilibrium (is the point where buying and selling forces are balanced). This is the price at which the market agrees. If the price is above this point, there will be excess supply (more sellers than buyers), so the price must fall. If the price is below this point, there will be excess demand (more buyers than sellers), so the price must rise.

In financial markets, what influences demand and supply?

###Factors determining demand

• Macroeconomic conditions: When interest rates are low, investors are less inclined to deposit money, so they buy stocks to seek profits.
• Market liquidity: A large amount of money in the market = many buyers.
• Confidence: If investors expect the company to grow, demand will increase.

###Factors determining supply

• Company policies: Capital increases by the company add more shares to the market; share buybacks reduce the number of shares.
• Initial Public Offerings (IPOs): Increase the number of shares available.
• Regulations: Various rules may restrict share sales.

How to use demand and supply in trading

###Method 1: Read candlesticks

• Green candle (closing price higher than opening price): Strong demand, price trending upward.
• Red candle (closing price lower than opening price): Strong supply, price trending downward.
• Doji (open and close at the same level): Indecision, no clear winner yet.

###Method 2: Find support and resistance levels

• Support (Support): A level where many buyers are present; price bounces up from here.
• Resistance (Resistance): A level with many sellers; price is pushed down below this level.

###Method 3: Demand Supply Zone Technique

When the price moves and then pauses within a range, this is a moment traders wait for. When the price breaks out of this range, you can trade in the direction of the trend.

Example of Drop-Base-Rally (DBR):

1. Price drops quickly (Drop): Many sellers.
2. Price stabilizes within a range (Base): Buyers enter, meeting sellers.
3. Price breaks upward (Rally): Good news or large buying volume.

Traders can enter on the breakout point with a Stop Loss placed below the range.

Studying demand and supply doesn’t have to be complicated

Just remember two things:

1. Price rising = more buyers = strong demand.
2. Price falling = more sellers = strong supply.

This principle applies to stocks, gold, silver, or other assets in the market. It’s just necessary to practice observing the Price Action of real prices until it becomes a habit. Then, investors will be able to better time their profit-taking.