Stock prices based on supply and demand: traders must understand clearly

Many people wonder why stock prices fluctuate randomly and unpredictably. In fact, all price movements are driven by two fundamental forces: demand (the desire to buy) and supply (the desire to sell). Once you understand this principle, predicting the direction of prices will no longer be a secret.

How simple is the meaning of demand and supply?

Demand is the quantity of a product that buyers want to purchase at various prices. When prices go down, people want to buy more; when prices go up, demand decreases. This is the “law of demand” that always holds true.

Supply is the quantity of a product that sellers want to sell at various prices. When prices are high, sellers are willing to sell more; when prices are low, they are less eager to sell. This is the “law of supply.”

These two forces are pushed together repeatedly until reaching a balance point, where buying and selling forces are equal. At this point, the price stabilizes and is likely to stay there.

Why are demand and supply important for investors?

In the stock market, stocks are just like other commodities. When investors have confidence in a company, they want to buy more shares of that company (demand increases), and the price rises accordingly.

Conversely, when bad news comes out, shareholders may want to sell (supply increases), leading to a decrease in price.

You can apply this principle both in fundamental analysis (Fundamental Analysis) to gauge market confidence in a company, and in technical analysis (Technical Analysis) to time your trades.

Factors affecting demand in the financial markets

Interest rates and economic growth: When interest rates are low, bank deposits are less attractive, so investors tend to buy more stocks.

Liquidity in the system: When more money circulates in the economy, people have more funds to invest, increasing demand.

Investor confidence: When the economy looks bright, investors feel optimistic and are willing to buy stocks. When news is gloomy, everyone tends to sell.

Factors affecting supply in the financial markets

Capital increases and share buybacks: When companies raise capital, the number of shares in the market increases (more supply). When they buy back their own shares, the supply decreases (less supply), which can push prices higher.

Initial Public Offerings (IPOs) (first time entering the stock exchange): When new companies go public, the total securities in the market increase, which may exert short-term pressure on prices.

Market regulations: Often, certain rules restrict the sale of shares by specific groups of shareholders, reducing supply.

How to read demand and supply from candlesticks

Green candlestick (closing price higher than opening price): Indicates buying pressure exceeds selling pressure; demand is strong; prices tend to rise.

Red candlestick (closing price lower than opening price): Indicates selling pressure exceeds buying pressure; supply is strong; prices tend to fall.

Doji candlestick (opening price equals closing price): Shows a balance between buying and selling forces; price is likely to stay steady until new factors emerge.

Demand Supply Zone techniques for trading

Price reversal (Reversal): When the price moves strongly in one direction, it often retraces in the opposite direction due to accumulated counterforces. Traders can enter trades when the price breaks through key levels.

Trend continuation (Continuation): Often, prices continue in the same direction, only pausing briefly. Traders can follow the trend and ride the money flow.

Summary: Practical use of demand and supply

Demand and supply are not just economic theories but powerful tools for investing. Understanding how buying and selling forces work helps you better predict price directions. Most importantly, it gives you the right perspective while other traders are still emotionally driven.

Applying these principles requires getting used to observing real numbers and prices, rather than just relying on theory, until you recognize patterns and timing correctly.