Supply and demand curves: Why stock prices change according to trading activity

Many investors wonder why stock prices move up and down, whether it’s a quick fluctuation or an unexpected plunge. In fact, these changes do not happen randomly but are the result of two forces that work continuously: the buying pressure (demand) and the selling pressure (supply). Understanding this relationship is therefore key to accurately timing the market.

Supply and Demand Curves: The Foundation of Price Movements

Before learning how to leverage these forces, we need to understand what each side represents.

Demand is the desire to buy at various price levels. When plotting this relationship on a graph, it results in a demand curve, which typically slopes (downward sloping). This reflects that the lower the price, the more people want to buy. Conversely, higher prices mean only a small group of buyers are willing to pay.

Supply, or the supply curve, is the desire to sell at various price levels. The supply curve usually slopes (upward sloping). This indicates that the higher the price, the more sellers are willing to offer their goods or securities, as they base their decisions on expected profits.

The point where the demand and supply curves intersect is called equilibrium (Equilibrium). At this point, the quantity that buyers want to purchase equals the quantity sellers want to sell. The resulting price is stable and there is no pressure to change.

Factors Driving Price Changes of Securities

In financial markets, supply and demand curves are not static; many factors can shift their positions:

Demand-side factors:

• Macroeconomic conditions (economic growth, inflation rate, interest rates)
• Liquidity of the financial system (money circulating in the market)
• Investor confidence (expectations about the future of the economy and companies)

Supply-side factors:

• Corporate decisions, such as capital increases or share buybacks, directly alter the number of shares in the market
• New listings (IPO) that increase the securities available
• Policies and regulations affecting the ability to offer securities

Recognizing Supply and Demand through Technical Analysis

Traders do not need to wait for geometric supply and demand curves to identify clear economic structures. They can read signals from price actions:

Candlestick patterns:

• Green candles (close higher than open) indicate strong demand, with buyers capable of pushing prices higher
• Red candles (close lower than open) indicate strong supply, with selling pressure driving prices down
• Doji candles (close near open) show indecision, with no clear dominance

Support and resistance levels:

• Support (Support) is an area with large demand waiting; prices falling to this level often reverse upward
• Resistance (Resistance) is an area with large supply; prices rising to this level often get pushed back down

Trend (Trend):

• If prices make higher highs, demand remains strong
• If prices make lower lows, supply dominates

Demand Supply Zone Technique for Timing

This technique aims to catch moments when the market loses balance and seeks a new equilibrium. It can be divided into two main groups:

###Reversal(

1) DBR )Demand Zone Drop Base Rally( - Reversal to an uptrend: Prices drop rapidly )Drop( to a demand-rich zone, then pause )Base(. When buying and selling forces clash, ultimately buying wins, causing prices to surge )Rally(.

2) RBD )Supply Zone Rally Base Drop( - Reversal to a downtrend: Prices rise quickly )Rally( to a supply-rich zone, then pause )Base(. When buying momentum wanes, selling pressure prevails, leading to a sharp decline )Drop(.

) Continuous Trend Movement ###Continuation(

1) RBR )Rally Base Rally( - Continuing uptrend: Prices rise, pause, then rise again as buying strength returns.

2) DBD )Drop Base Drop( - Continuing downtrend: Prices fall, pause, then fall again as selling strength resumes.

From Theory to Practice

Supply curves exist on all price charts, but the challenge lies in recognizing their positions and the behaviors that follow, which require extensive experience. Studying real market data and collecting observations from past markets help traders make faster and more accurate decisions, whether it’s finding good entry points or identifying appropriate stop-loss levels.

A deep understanding of supply lines and the fundamental buying and selling forces is therefore an invaluable tool for modern market investing.