Why do investors need to understand the art of supply and demand in the stock market

If you’ve ever wondered why stock prices suddenly go up and down, the answer may lie in understanding demand and supply. Economists have used this principle for centuries to explain how the prices of any goods are determined. Modern investors also apply the same principle to predict price movements in financial markets.

Before Trading, Know the Forces of Buying and Selling

The stock market is where buying and selling forces clash every second. When buying pressure exceeds, prices rise. When selling pressure dominates, prices fall. These forces are demand and supply, which are fundamental to price analysis.

For novice traders, does understanding this concept seem complicated? But if you can grasp that the market is “hungry” for demand ( to buy ) or “full” supply ( wants to sell ), you’ll have the information to see opportunities.

The Meaning of Demand and Supply: It’s Easier Than You Think

Demand (Demand) - Buying pressure

When prices drop, more people want to buy. When prices rise, people reduce their purchase volume. This is the basic law of demand. It’s quite instinctive.

On a price chart, the demand line slopes downward from left to right, indicating that at lower prices, the purchase volume increases.

Factors driving demand include:

• Investors’ income and market liquidity
• Confidence in the economy
• Earnings forecasts of companies
• News and events affecting value

The better the news, the stronger the buying force, and the higher the demand, the higher the price.

Supply (Supply) - Selling pressure

Supply is the opposite of demand. When prices rise, sellers are willing to sell more. When prices fall, sellers hold back.

On the chart, the supply line slopes upward from left to right, showing that at higher prices, the offering volume increases.

Supply is influenced by:

• Company policies (capital increase, share buyback )
• New IPOs (IPO)
• Regulatory conditions
• Number of competitors in the market

Price Equilibrium (Equilibrium): The Market’s Calm Point

Where the demand and supply lines intersect is the equilibrium point. This is the “fair” price where neither buyers nor sellers want to change.

If the price exceeds equilibrium:

• Sellers become more aggressive, perceiving overvaluation
• Buyers reduce their interest, seeing it as expensive
• Result: excess supply → price drops back to equilibrium

If the price drops below equilibrium:

• Buyers become eager, attracted by low prices
• Sellers hold back, fearing losses
• Result: excess demand → price rises back to equilibrium

What Drives Demand and Supply in the Real Market

Demand Side: When Sentiment Turns Cooler or Hotter

Macroeconomic factors such as interest rate policies, inflation, and economic growth have a huge impact. For example, if investors believe the economy will improve, they rush into the stock market, increasing demand.

System liquidity: More money circulating in the system means investors have more capacity to buy risky assets.

Investor confidence: Good news, strong earnings, new projects boost buying. Conversely, shocking news prompts investors to sell quickly.

Supply Side: Companies and Regulation

Offering policies: When companies issue new shares (capital increase), supply increases. When they buy back shares, supply decreases.

New IPOs: When new companies go public, they introduce new securities, suddenly increasing supply.

Market regulations: Sometimes, regulatory powers limit large shareholders from selling, e.g., (Silent Period), reducing supply.

Practical Application: Demand Supply Zone and Timing

Instead of just theory, see how traders use these principles.

Pattern 1: Drop and Reversal (DBR - Drop Base Rally)

Occurs when:

1. Massive selling causes rapid price decline
2. As prices fall, buyers see value and start buying
3. Price reaches a point where buying and selling forces are balanced (forming a base)
4. Good news arrives, buyers regain strength, price breaks through the base and moves up

Traders buy at “breakout” points, setting stop-loss below the base.

Pattern 2: Run-up and Reversal (RBD - Rally Base Drop)

Occurs when:

1. Strong buying pushes prices up to a high level
2. At high prices, sellers see opportunity and start selling
3. Price consolidates in a range
4. Negative news arrives, selling pressure wins, price breaks below the range and plunges

Traders sell at “breakdown” points.

Patterns 3 & 4: Continuation Trends (RBR / DBD)

These occur when the trend continues, such as:

• RBR (Rally Base Rally): Uptrend → consolidation → continuation up
• DBD (Drop Base Drop): Downtrend → consolidation → continuation down

Traders enter “breakout” trades in the direction of the trend.

Spot Support & Resistance with Your Eyes

Support (Support): The level where buyers are waiting. When price hits this point, buying interest increases, causing price to bounce up.

Resistance (Resistance): The level where sellers are waiting. When price reaches this point, selling interest intensifies, causing price to reverse downward.

Many traders base entry/exit decisions on these levels. When price “breaks through,” it often continues in that direction.

Candle Stick Techniques: What Do Candles Tell Us?

Green candle (Close above open): Buying pressure wins Red candle (Close below open): Selling pressure wins Doji (Open-close near each other): Indecision, no clear trend

Often, the price follows the trend of the last few candles. If there are many green candles, the trend may continue.

When Investing, Remember External Factors

The meaning of demand and supply becomes clearer when considering that they are not just numbers on a chart but decisions made by many people. These decisions depend on:

• News and Events: Company news, economic reports, interest rate policies
• Seasonality: Certain stocks perform better in specific seasons
• Current Trends: AI programs? Everyone focusing on Tech stocks?
• Investor Sentiment: Market confidence (Sentiment) influences price swings

Simplify with a Three-Level System

Level 1 - Identify the trend: Is the market rising or falling?

Level 2 - Analyze candles: Who is winning now, buyers or sellers?

Level 3 - Check proximity: Is the price near Support/Resistance? Is a bounce or reversal likely?

Combining these three levels provides a comprehensive view of overall demand and supply movements.

Summary: Why Should You Care?

Demand and supply are not just economic terms; they are the fundamental mechanisms that determine prices in all markets—from stocks, electricity, to crypto.

If you understand:

• When demand is strong and when buying pressure is high
• When supply is abundant and selling pressure is coming in
• Where the equilibrium point is and whether prices will continue or reverse

You gain valuable information (even though it’s not 100% certain) to make better investment and trading decisions.

Remember, markets are both an art and a science. Observation and practice are key to reaching a deeper understanding.