Supply Demand is | Why traders need to understand buying and selling pressure

If you’ve ever wondered what causes stock prices to go up or down, the answer lies in supply and demand, or simply put, supply demand is the buying and selling forces that clash in the market. Once you understand this principle well, investors can better read market needs.

Understanding Supply and Demand from the Basics

What is (Demand)?

Demand refers to the desire to buy goods at different price levels. When prices drop, buyers want to purchase more. Conversely, when prices rise, demand decreases. This is called the law of demand — an inverse relationship between price and quantity.

The causes of this law are twofold:

• Income effect: When the price of a product decreases, your money stretches further, allowing you to buy more.
• Substitution effect: When the price of one product drops, it becomes cheaper than alternatives, attracting consumers to switch and buy this instead.

Besides price, other factors affecting demand include consumer income, tastes, the number of buyers, and future price expectations.

What is (Supply)?

Supply is the willingness to sell goods at different price levels, opposite to demand. When prices increase, sellers want to sell more because profits are higher. This is called the law of supply — a direct relationship between price and quantity.

Factors influencing supply include production costs, technology, the number of competitors, price expectations, and regulations.

Price Equilibrium ( - where buying and selling meet

The actual market price is not determined by demand or supply alone but occurs at the point where demand equals supply. This is called equilibrium.

At this point, prices tend to stabilize because:

• If the price is too high: sellers want to sell more, but buyers are hesitant to buy, leading to excess supply. Prices must fall.
• If the price is too low: buyers compete for limited goods, but sellers are unwilling to sell at low prices, leading to shortages. Prices must rise.

Supply and Demand in the Financial Market - Why do stocks go up and down?

In the stock market, the principles of supply and demand still apply but are more complex:

) Factors Driving Investment Demand ###Demand(

• Economic environment: Low interest rates mean bank savings yield less, encouraging investors to put more money into stocks.
• Money liquidity: When there’s abundant money in the financial system, people have more funds to invest.
• Investor confidence: Good news about companies or the economy makes people eager to buy stocks.

) Factors Affecting Supply ###Supply(

• Company capital raising: When a company issues new shares, supply increases, possibly lowering the price.
• Share buybacks: When a company repurchases its own shares, supply decreases, which can push prices up.
• News and information: Bad news about a company can cause shareholders to sell.

How to Use Supply and Demand to Trade Stocks

) 1. Fundamental Analysis ###Fundamental Analysis(

When stock prices fall, it may reflect many sellers wanting to dispose of shares or bad news about the company. But if the news does not reflect the company’s true value, it could be an opportunity to buy.

Conversely, when prices rise, it’s important to verify whether good news is genuine or just high prices set to chase profits.

) 2. Technical Analysis ###Technical Analysis(

Traders often use various tools to identify supply and demand:

Candlestick )Candle Stick(

• Green = Buying pressure wins; close price higher than open
• Red = Selling pressure wins; close price lower than open
• Doji = Equal buying and selling; no clear direction

Trend )Trend(

• If prices make new highs consistently = strong demand
• If prices make new lows consistently = strong supply
• If prices move sideways within a range = balanced forces

Support & Resistance )Support & Resistance(

• Support = Price level where buying interest is strong enough to prevent further decline
• Resistance = Price level where selling interest is strong enough to prevent further rise

Demand Supply Zone Technique - Triggering Price Reversals

A popular technique for supply and demand is the Demand Supply Zone, which involves identifying points where price loses balance and predicting a return to equilibrium.

) Pattern 1: Uptrend ###DBR - Drop Base Rally(

Price drops )Drop( due to heavy selling. When the price reaches a certain low, buyers start to step in, causing a pause in the range )Base(. Then, with good news or new factors, buying pressure overcomes, breaking the upper range, and rallying upward )Rally(.

Buy signal: Enter at breakout of the range with a stop loss below the range.

) Pattern 2: Downtrend ###RBD - Rally Base Drop(

Price rises )Rally( due to strong buying. When the price reaches a certain high, sellers start to offer, causing a pause )Base(. Then, bad news or negative factors arrive, selling pressure wins, breaking below the range, and dropping )Drop(.

Sell signal: Enter at breakout of the lower range with a stop loss above the range.

) Pattern 3: Continuing Uptrend ###RBR - Rally Base Rally(

Price moves up, pauses, then continues upward, indicating strong buying interest still present.

) Pattern 4: Continuing Downtrend ###DBD - Drop Base Drop(

Price drops, pauses, then drops again, showing persistent selling pressure and indecision.

Tips for Effective Use of Supply and Demand

1. Be patient: Supply and demand should be combined with other indicators, not used alone.
2. Learn from real prices: Theories are good, but practical application on charts is essential.
3. Practice regularly: Spotting good opportunities requires experience.
4. Manage risk: Always set stop losses, as predictions can be wrong.

Summary

Supply and demand are key to understanding the market. Whether you are an economist, trader, or general investor, everyone uses this principle. Once you understand how buying and selling forces work, you’ll be better equipped to read the market and make informed investment decisions.