Supply rules: Essential tools investors need to understand to forecast stock prices

In the financial markets, stock prices do not move randomly but are driven by clear mechanisms. That is the balance between buyers and sellers. The economic principle that demand and supply are not just theoretical concepts but real tools that can help investors predict price trends.

What are Demand and Supply: From a Trader’s Perspective

Demand is the buying force—the willingness of buyers to pay for shares. When buying pressure is strong, prices tend to rise. Conversely, Supply is the selling force—the volume of shares sellers want to sell. When supply exceeds demand, prices are pushed down.

The relationship between the two creates an equilibrium (Equilibrium), which is a price acceptable to both buyers and sellers. When this balance is broken, prices will start to seek a new equilibrium.

The Law of Supply: Why Prices Rise When Selling Pressure Weakens

The law of supply tells us that when prices increase, sellers will slow down selling because they wait to sell at higher prices. Conversely, when prices fall, sellers will rush to sell to avoid further losses.

For example, if a stock is priced at 100 units and is being hurriedly sold, but if it adjusts to 120 units, sellers will wait for a higher price. This relationship is at the heart of price movements.

Factors Driving Demand in the Stock Market

• Good news: Increased earnings, high forecasted profits, expanding market share → Strong buying pressure
• Interest rates: When interest rates are low, investors seek returns in the stock market → Increased demand
• General liquidity: When the system has abundant money, investors have funds to buy stocks
• Confidence: A thriving economy and a robust system → Investors are willing to buy

Factors Leading to Supply

• Bad news: Poor earnings, disappointing profit announcements → Increased selling pressure
• Company policies: Capital increases lead to more shares in the market → Increased supply
• New IPOs: New companies entering the market → Offering new securities
• Morale: Rising anxiety causes investors to sell quickly → Strong selling pressure

Price Equilibrium: The Intersection of Both Forces

When the demand and supply lines intersect, that point is the equilibrium, where prices tend to stabilize.

• If prices are above equilibrium: Excess supply → Belief that stocks are expensive → More sellers → Price is pushed down
• If prices are below equilibrium: Excess demand → Belief that stocks are cheap → More buyers → Price is pushed up

Markets always seek a “fair price.”

Applying the Law of Supply in Fundamental Analysis

When a company’s CEO announces a 50% increase in profits, this signals to investors that “the company is growing.” Demand then intensifies, with people wanting to buy at higher prices than before.

Conversely, if profits are worse than expected, investors rush to sell, increasing supply and causing prices to fall.

News changes are not the direct cause of price changes but influence human trading decisions, which in turn alter demand and supply.

Applying the Law of Supply in Technical Analysis

1. Analyzing Buying and Selling Pressure from Candlesticks

• Green candlestick (Close > Open): Strong demand; buyers can hold their ground
• Red candlestick (Close < Open): Strong supply; sellers have the upper hand
• Doji (Close ≈ Open): Both sides are in balance; no clear winner

2. Finding Support & Resistance(

Support is a price level with abundant demand, meaning people are ready to buy at this point. When the price reaches this level, buying pressure may prevent further decline.

Resistance is a price level with abundant supply, meaning people are ready to sell at this point. When the price approaches, selling pressure may prevent further rise.

Designing support and resistance points involves identifying where supply and demand are likely to pause.

) 3. Trend Analysis###

• Uptrend: Prices make new highs consistently → Demand remains strong
• Downtrend: Prices make new lows consistently → Supply remains strong
• Sideways: Price fluctuates within a range → Both forces are balanced

Demand Supply Zone Technique: Timing Entry and Exit Points

Many traders use this technique to identify entry and exit points by detecting where the price loses equilibrium.

( 1. DBR Pattern) Demand Zone Drop Base Rally###

Evolution: Price drops (plummets) → Base (consolidates) → Rallies (upward)

Rate: Excess supply causes the price to fall. When the price is low, investors see it as cheap and buy, causing the price to stabilize. When good factors return, the price breaks upward.

Trading method: Wait for the price to break above the resistance, then set a Stop Loss at the lower boundary.

( 2. RBR Pattern) Rally Base Rally### - Continuing Uptrend

Evolution: Price rallies (upward) → Base (consolidates) → Rally (continues)

Rate: Strong demand; prices keep rising. Sometimes, the price pauses, but when buying pressure resumes, the price turns upward again.

Trading method: Enter on breakout above the resistance, targeting the previous high or higher.

( 3. RBD Pattern) Rally Base Drop### - Downtrend Resumes

Evolution: Price rallies (upward) → Base (consolidates) → Drops (downward)

Rate: Demand has exhausted; the price pauses after rising or has residual funds. When negative factors appear, the price reverses downward.

Trading method: Enter on breakout below the support, targeting the previous low.

Summary: Why the Law of Supply is Crucial for Investors

Demand and supply are not just terms learned in economics textbooks. They are the language the stock market uses to communicate. Traders and investors who understand how buying and selling pressures change can predict prices more accurately.

The law of supply teaches us when sellers start to slow down, when demand remains strong, and where the market might stop deceiving. Those who study and observe market actions closely will find this understanding to be a valuable asset for their investments.