Supply and demand refer to buying and selling forces - only investors understand this deeply.

If you’ve ever wondered “Why do stock prices go up today and down tomorrow?” it might be because you haven’t fully understood what demand and supply really mean. In truth, everything that drives prices in the financial markets is the clash between buying and selling forces. This is a fundamental concept that every professional investor must deeply understand. Knowing these forces is like seeing the hidden picture behind the price.

Here it is – What Demand and Supply Really Are

When talking about demand and supply, simply put, it’s the clash between buyers wanting to buy and sellers wanting to sell. It’s not difficult, but often most investors treat it as just a textbook term in economics.

Demand refers to the desire to buy. When prices fall, people want to buy more (their purchasing power increases). Conversely, when prices are high, they buy less. This is a natural market law, driven by two reasons: when prices drop, your money is worth more (Income Effect), and you might switch to buying this product instead of others because it seems more valuable (Substitution Effect).

Supply refers to the desire to sell. When prices are high, sellers want to sell more because they can make more profit. When prices are low, they are less willing to sell or sometimes can’t sell at all. This natural behavior exists in all markets, whether stocks or other goods.

Factors influencing demand are not just price. They include income levels, tastes, future price expectations, political changes, or even market psychology trends. For supply, factors include production costs, technology, tax policies, access to capital, and when supply chain disruptions occur.

The Power of Buying and Selling Forces Moving Prices

The real driver of price determination in the market is reaching Equilibrium — the point where buying and selling forces are balanced. At this point, price and trading volume tend to stabilize, and prices won’t fluctuate wildly.

When buying power exceeds selling, buyers are willing to pay higher prices because goods are scarce. Prices slide upward. But as prices rise, sellers see good profits and offer more, or some buyers, seeing prices as too high, hold back. Both sides approach a point of balance, and prices stop rising. Conversely, if selling exceeds buying, sellers lower prices to attract buyers, and the price drops until a new balance is found.

Financial Markets: What Are Demand and Supply Doing?

In the stock market, the price of each stock isn’t determined solely by its cost of production but by the demand to buy and sell. Demand increases due to factors like lower interest rates (people shift from cash to stocks) or strong earnings reports (investors see value and buy more).

Selling demand can rise because shareholders want to realize profits or fear further declines. Companies want clear profits, and demand can also increase from new IPO announcements or changes in tax policies and regulations. Sometimes, market sentiment or clever trading strategies also influence demand and supply.

These movements often cause price fluctuations.

Reading Candlesticks to See True Buying and Selling Power

If you look at candlestick charts with an understanding of demand and supply, you’ll see more.

A green (bullish) candle indicates buying dominance; the market wants higher prices. The larger the candle, the stronger the buying force. A red (bearish) candle shows selling pressure; the larger it is, the more intense the selling.

A Doji (where open and close are nearly the same) signals a tug-of-war between buyers and sellers, with no clear winner. The market is undecided.

Frequent candlestick movements help investors see the real buying and selling forces at play.

Support and Resistance: Catching the Golden Moment

Support is a price level where buyers still have strength, believing the price is attractive. When the price drops to this level, buying interest increases, preventing further decline.

Resistance is a price level where sellers are strong, or previous buyers start selling. When the price reaches this point, selling pressure increases, halting upward movement or reversing it.

Understanding where buying and selling forces converge helps investors decide when to enter or be cautious.

Demand and Supply Zones: Professional Timing Techniques

Demand Supply Zone techniques are based on observing rapid price movements (up or down), indicating market imbalance of demand or supply. After such moves, prices often pause, form bases, and then continue in the same or opposite direction when new factors emerge.

First pattern - Drop Base Rally (DBR): Price drops sharply (Drop), showing excess supply. When it hits a low enough point, buying interest returns, forming a base, and then rallies upward. Traders often enter on breakouts of the base, placing stop-loss orders below.

Second pattern - Rally Base Drop (RBD): Price rises quickly (Rally), then sellers re-enter, forming a base, and then drops. Entry occurs on breakdowns, with stop-loss orders above.

Third pattern - Rally Base Rally (RBR): Price rises from a base, consolidates within a range, then continues upward (Rally). Common in bullish trends, with entries on breakouts above the base.

Fourth pattern - Drop Base Drop (DBD): Price declines from a base, then continues downward, often in a downtrend, with entries on breakdowns.

These techniques help traders see past buying and selling forces and predict future movements systematically.

Effective Ways to Deepen Your Understanding

Genuine knowledge of demand and supply requires continuous practice:

• Observe real prices: Focus on candlesticks, identify support and resistance levels based on actual data, not assumptions.
• Analyze volume: Check trading volume to understand the strength behind price moves.
• Identify trends: Determine if prices are rising, falling, or consolidating, and what might be driving these moves.
• Combine ideas: Use demand and supply concepts alongside other information like news, earnings reports, policy changes.

Demand and Supply — The Investor’s Playground

In summary, demand and supply refer to the relationship between buying and selling forces in the market, which set the current prices. It’s not complicated at its core but involves recognizing natural imbalances and using them to make smarter investment decisions.

Every time you look at a candlestick, try to see the clash between buyers and sellers. Over time, this perspective will become clearer, and your trading results are likely to improve.