Why are supply and demand the key to stock trading: Summary and practical application

What Natural Law Moves Stock Prices

If you’ve ever wondered why a stock sometimes soars on certain days and plummets on others, the answer lies in the simplest yet most effective economic principle: Demand and Supply

Suppose you have something to sell, and two parties come in: one wants to buy a lot, and the other is trying to sell off. Imagine how the price would move—it’s easy to say that the price will follow the stronger side.

Stocks and other financial assets in the market work the same way. The problem is that most investors need to understand more deeply what demand and supply really are and how they relate to stock prices.

What is (Demand) and Why Does It Move Opposite to Price

Demand refers to the desire to buy goods or services at various price levels. When we plot this desire on a graph, we get a downward-sloping demand curve, meaning that as prices go up, the desire to buy decreases; as prices go down, the desire to buy increases.

This phenomenon occurs for two reasons:

Income Effect (Income Effect): When the price of a good drops, the real value of your money increases. (You have more money left after purchasing), so you can buy more than before.

Substitution Effect (Substitution Effect): When the price drops, this good becomes a more attractive option compared to other goods. People who previously used alternatives will switch to this good.

In the financial market, demand is influenced not only by price but also by:

• Investors’ income and wealth
• Economic confidence
• Interest rates (Low interest rates = more people invest in stocks)
• Positive news and information
• Growth forecasts of companies

What is (Supply) and Why Does It Move in the Same Direction as Price

Supply refers to the willingness to sell goods or services at various price levels. The supply curve slopes upward, meaning that as prices increase, sellers are willing to sell more; as prices decrease, they sell less.

In the stock market, supply is affected by:

• The number of shares issued by the company (IPO or Capital Increase)
• Company’s share buyback policies (reducing supply)
• Decisions by major shareholders to sell
• Market liquidity (low when no one is buying)
• Regulations and trading restrictions

Equilibrium (: The Point Where Price Stops Moving

Equilibrium is where the demand and supply curves intersect. This is the point where the price should be set because at this point, the quantity buyers want to buy equals the quantity sellers want to sell.

If the price is above the equilibrium point, supply exceeds demand, leading to an oversupply of shares in the market, which forces the price down back to equilibrium. If the price is below equilibrium, demand exceeds supply, causing shortages and buyers rushing in, pushing the price up again to equilibrium.

Demand and Supply in Fundamental Analysis

From a fundamental investor’s perspective, stock prices reflect the intrinsic value of a company, and changes in demand and supply originate from changes in earnings expectations.

When good news comes out )strong earnings, good growth(, buying pressure increases, demand for stocks rises, selling pressure decreases, and prices go up. Conversely, bad news )poor earnings( causes selling pressure to increase, demand to decrease, and prices to fall.

Predicting Stock Prices with Technical Tools

) 1. Price Action and Candlesticks

Green Candlestick ###closes higher than it opens( indicates buying strength over selling, suggesting that prices may continue to rise.

Red Candlestick )closes lower than it opens( indicates selling strength over buying, suggesting prices may continue to decline.

Doji Candlestick )opens and closes near the same level( shows indecision between buyers and sellers, with no clear direction, and prices may not move much until new variables emerge.

) 2. Trend Analysis

When prices keep making new highs, it indicates buying momentum and a potential continuation upward. Conversely, when prices keep making new lows, it indicates selling momentum and a potential downward trend.

3. Support and Resistance

Support is where demand is waiting to buy ###the point investors see as fair(. When prices fall to this level, they often reverse upward.

Resistance is where supply is waiting to sell )the point investors see as expensive(. When prices reach this level, they often reverse downward.

Applying Demand and Supply Zones in Trading

) Reversal Trading ###Reversal(

1. Demand Zone Drop Base Rally )DBR( - Trading for an Uptrend Reversal

Occurs when: Excessive selling pushes prices sharply down )Drop( → prices stabilize and form a base )Base( → selling pressure diminishes, and buying returns strongly → price breaks out of the base and reverses upward )Rally(

Trading method: Enter buy orders at the breakout above the base, with stop-loss below the base’s lowest point.

2. Supply Zone Rally Base Drop )RBD( - Trading for a Downtrend Reversal

Occurs when: Excessive buying pushes prices rapidly upward )Rally( → prices stabilize and form a base )Base( → buying pressure diminishes, and selling returns strongly → price breaks below the base and reverses downward )Drop(

Trading method: Enter sell orders at the breakdown below the base, with stop-loss above the base’s highest point.

) Trend Continuation Trading ###Continuation(

1. Rally Base Rally )RBR( - Uptrend Continuation

Strong demand pushes prices higher )First Rally( → prices pause and form a base )Base( → positive news or factors return, strengthening buying → price breaks above the base and continues upward )Second Rally(

Trading method: Enter buy orders at the breakout or when price moves out of the base, aiming for the next high.

2. Drop Base Drop )DBD( - Downtrend Continuation

Strong supply pushes prices lower )First Drop( → prices pause and form a base )Base( → negative news or factors return, strengthening selling → price breaks below the base and continues downward )Second Drop(

Trading method: Enter sell orders at the breakdown or when price moves out of the base, targeting the next low.

Summary: What Are Demand and Supply and Why Are They Important

Demand and supply are not just economic theories from textbooks but real rules that operate in every moment, every second.

Once you understand which side is winning in the market, you start to see patterns. You can better predict price movements, and most importantly, you can make smarter entries and exits in your trades.

Learning this is not difficult if you prepare with perseverance. Try applying these principles to real price charts on your system, and you will clearly see how demand and supply work in real life.