Why do traders need to understand supply and demand to catch the market trend?

When you observe stock values soaring or plummeting, the underlying driver behind these movements is not just news, but the fundamental forces of supply and demand colliding in the market. Understanding this will help you avoid rash investment decisions.

Demand and Supply: What Are They?

Demand (Demand) is the desire of buyers to acquire goods or services at various prices. When prices decrease, more people want to buy. Conversely, when prices rise, the number of buyers decreases. This inverse relationship always appears on the graph line.

Supply (Supply) is the quantity of goods that sellers are willing to offer at different prices. The law of supply states that when prices are high, sellers will bring more goods to the market. When prices fall, they will slow down their offerings. This relationship is in the same direction.

When the demand and supply lines intersect—at the equilibrium point—the price stabilizes, and there is no immediate pressure for the price to change because both buyers and sellers are satisfied with the current price.

Financial Markets: What Factors Drive Changes in Demand and Supply?

In the world of stocks and digital assets, various factors influence demand and supply:

Demand side:

• Low interest rates = investors seek higher returns in stocks and other investments
• High liquidity in the financial system = abundant money circulating in the market
• High market confidence = people are more willing to make investment decisions

Supply side:

• Companies decide to raise capital = more shares enter the market, increasing supply
• Companies buy back shares = market supply decreases, tending to push prices up
• New companies go public (IPO) = introducing new securities into the market

How to View Demand and Supply Using Candlesticks and Price Trends

Modern traders use various signals to assess:

Green candlestick = demand wins, strong buying pressure, close price higher than open

Red candlestick = supply wins, strong selling pressure, close price lower than open

Doji = equilibrium, both sides exerting pressure, direction uncertain

When prices continually reach new highs, demand remains strong. When prices hit new lows, supply dominates. When movement is within a range, neither side has gained the upper hand.

Demand Supply Zone: Techniques Traders Use to Catch the Moment

A popular method to apply demand and supply is to identify moments when excess demand or supply dissipates and the price reverses direction.

Demand Zone Drop Base Rally (DBR) - Uptrend Trading: Price drops sharply (Drop) due to heavy selling pressure. Then it pauses (Base). When selling slows and buying increases, and buying overtakes selling, the price breaks through the ceiling of the range (Rally). Traders buy at this point.

Supply Zone Rally Base Drop (RBD) - Downtrend Trading: Price moves up briskly (Rally). When buying is exhausted, it pauses (Base). As selling gradually increases, and selling overtakes buying, the price breaks below the range (Drop). Traders sell at this point.

Trading within demand and supply zones is not as difficult as it seems; it just requires seeing where the price is heading. The market is the classroom.

Finally: When Should You Use the Law of Supply?

Whether you are doing fundamental analysis or technical analysis, demand and supply are fundamental tools. Knowing “who is winning in the market right now” provides valuable information to assess opportunities. Of course, mastering this requires trial and error in real markets to develop true intuition.