Why Traders Need to Understand the Dynamics of Trading: Supply and Demand in the Financial Market

Stock prices we see on the trading screen are not generated randomly or by luck, but are the result of the clash between two forces: buyers and sellers. Understanding the mechanisms of supply and demand becomes a crucial tool that helps investors read market sentiment and make rational decisions.

Basic Concept: What Are Demand and Supply

###Understanding Demand (Demand) and Supply (Supply)

Demand is not as complicated as it seems. It is the desire to buy from people at each price level. When prices decrease, people are more willing to buy more. But when prices rise, the demand to buy decreases. This is called the Law of Demand, which reflects natural human behavior.

On the other hand, Supply is the opposite — the quantity of goods that sellers are willing to offer at each price level. According to the law of supply, when prices increase, producers are more interested in selling more. Conversely, when prices fall, the motivation to sell decreases as well.

When two forces meet: Equilibrium (Equilibrium)

Stable prices do not arise solely from demand or supply alone. They occur at the equilibrium point — where the demand and supply curves intersect. At this point, the quantity buyers want to purchase equals the quantity sellers want to sell.

When prices deviate from equilibrium, market forces create pressure to bring prices back:

• If prices are too high, sellers want to sell more but buyers buy less → surplus of goods → downward pressure on price
• If prices are too low, buyers want to buy more but sellers sell less → shortage → upward pressure on price

The Mechanisms Driving Changes in Demand and Supply

Macroeconomic Factors Affecting Demand

Maintaining inflation at a safe level boosts consumer confidence in spending. When interest rates are low, investors seek higher returns in the stock market rather than deposits. Increased liquidity in the financial system allows more money to flow into the markets.

Investor confidence is a powerful psychological factor. News that the economy will grow or companies will profit highly immediately increases buyer enthusiasm across the board. Conversely, even minor negative news can be enough to increase selling activity.

Internal Company Factors Influencing Supply

When a company decides to raise capital, new shares are issued into the market, increasing supply. Conversely, share buyback programs reduce the number of shares in circulation, often supporting the stock price.

As a new company entering the market via an IPO, large amounts of securities are brought into the market, which can temporarily pressure prices. Regulations and stock exchange rules, such as restrictions on major shareholders selling during the Silent Period, also affect supply flow.

Using Demand and Supply in Stock Analysis

Fundamental Analysis Perspective

Stocks are viewed as a normal commodity, and the principles of demand and supply can be applied. Rising stock prices indicate more buyers than sellers, while falling prices reflect strong selling pressure.

From a fundamental perspective, stock price changes are driven by market expectations of the company’s value, not by management or the board announcing excellent performance or growth. Buyers are happy to purchase at higher prices or larger volumes, while sellers delay selling, causing prices to rise.

Price Action Analysis (Price Action)

Technical traders look for green candlesticks (Close > Open) indicating buyers dominate and push prices higher. Conversely, red candlesticks (Close < Open) show selling pressure winning and prices falling from high levels.

Doji Candles (Open ≈ Close) indicate indecision between buyers and sellers, resulting in the price remaining at the same level. This often signals that a major change is imminent.

Price Trend as a Measure of Demand and Supply

When prices continuously make new highs, it indicates buyers still have strength and want to buy more than sellers. Conversely, if prices keep making new lows, it shows selling pressure remains dominant.

If prices cannot break out of a narrow range, it signals a tense standoff between the two forces, waiting for new signals to determine the next direction.

Support and Resistance Levels for Demand and Supply Analysis

Support (Support) is the price level where buyers are interested in entering — investors see the price as reasonable to buy. When prices fall to this level, demand increases.

Resistance (Resistance) is where sellers are willing to sell — investors see the price as high enough to sell. When prices reach this point, supply increases.

Demand Supply Zone Techniques: Reading Market Signals

Reversal Patterns (Reversal Pattern)

Drop Base Rally (DBR) — When selling pressure hits downwards, prices fall rapidly (Drop) until buying interest enters, creating a congestion zone (Base). Then, good news arrives, and prices break through this zone (Rally). Traders can enter positions at the breakout point with stop-loss placement.

Rally Base Drop (RBD) — Acts like a reflection, with buying pushing prices up quickly (Rally). After being rejected at a high level, a congestion zone (Base) forms. Negative news then causes prices to break down through this zone (Drop). Traders can enter short positions at the breakout point.

Continuation Patterns (Continuation Pattern)

Rally Base Rally (RBR) — An ongoing bullish trend where buyers keep pushing prices higher, even during pauses (Base). The upward momentum resumes (Rally).

Drop Base Drop (DBD) — A persistent bearish trend where sellers continue to push prices down, with only temporary pauses (Base). When selling pressure returns, prices are driven lower again (Drop).

Applying in Trading

Experienced demand and supply zone readers find it easier to identify trading opportunities, whether waiting for trend reversals or following the trend. Merely knowing where to set stop-loss points is not enough.

The most important thing is to understand that every price change results from the clash between two forces. It is predictable which side will win at any moment, enabling investors to develop appropriate trading plans.

Summary

Demand and supply are not just dull economic concepts but are keys to understanding price movements in financial markets. Whether for long-term investors or short-term traders, mastering the ability to read demand and supply signals will elevate trading and investment performance.

The law of demand and supply states: When demand increases, prices go up; when supply exceeds demand, prices fall; and at the point where they meet, the price stabilizes. This understanding helps everyone move forward in trading and investing with more reason rather than superstition.