Why do traders need to understand supply when prices never lie

In the financial markets, the prices of stocks or any assets are not determined by weather or personal preferences. They are driven by a relentless force: buying pressure versus selling pressure, or in economic terms, demand and supply. Once you understand this mechanism, you’ll see the markets differently.

What is supply and why is it important for investing

Before diving into complex economic numbers, think simply first.

Demand is: The desire to buy at various price levels. When prices drop, more people want to buy. When prices are high, fewer want to buy.

Supply is: The desire to sell. The same principle applies. When prices are high, sellers want to sell more. When prices are low, they are less willing to part with their assets.

These two forces are constantly battling in the market, on each (timeframe) and across different asset types. The movement of prices is determined by the equilibrium point of these two forces.

When does demand have the upper hand

Imagine a cube balanced on a needle. If the force from below pushes harder, (demand), the cube lifts up, and stock prices rise as well.

When demand is strong:

• Buyers rush in, willing to pay higher prices to acquire assets
• Sellers hold back, seeing potential for further price increases
• Result: prices surge continuously

What drives demand in the stock market:

• Good news from companies (increased profits, big contracts, new markets)
• Confidence in macroeconomics (low interest rates, capital inflows)
• FOMO (Fear of Missing Out) (FOMO): When the market is strong, investors fear missing out and buy in
• Personal confidence (leaders, analysts, or influencers setting targets)

When does supply dip

Conversely, when the force from above (supply) increases, the cube is pushed down, and stock prices fall.

When supply is strong:

• Sellers take profits or cut losses, lowering prices
• Buyers hold back, waiting for better opportunities
• Result: prices decline steadily

What drives supply in the stock market:

• Bad news from companies (decreased profits, legal issues, management changes)
• Poor economic signals (unemployment, high inflation, war)
• Accumulation of profits by insiders or major shareholders
• Fear spreads (panic selling) as the market deteriorates

Price equilibrium: where both forces meet

Economists call it Equilibrium; traders refer to it as Support & Resistance. They are the same point.

At the equilibrium price:

• Demand = Supply → Price temporarily stabilizes, creating a turning point
• If the price breaks above equilibrium, new selling pressure emerges, pulling the price back
• If the price drops below equilibrium, buying interest increases, pushing the price up again

For this reason, prices tend to return to equilibrium points unless a major new factor disrupts them.

How supply appears on candlesticks (Candle Stick)

Bullish green candlestick (Bullish):

• Close > Open → Buyers dominate ↑
• Long body with short upper wick indicates strong buying pressure
• In trader language: “Buyers are chasing”

Bearish red candlestick (Bearish):

• Close < Open → Sellers dominate ↓
• Long body with short lower wick indicates strong selling pressure
• In trader language: “Sellers are pushing down”

Doji (Doji):

• Open ≈ Close → Demand and supply are balanced
• Indicates uncertainty, potential reversal point
• In trader language: “Walking alone”

Trading using Demand & Supply Zones

Practitioners develop “Demand & Supply Zones,” which involve identifying points where:

1. Price moves strongly (Run) → Indicates imbalance
2. Price consolidates in a range (Base) → Demand and supply start to balance
3. Price breaks out of the range (Breakout) → Either demand or supply wins, continuing the move

Scenario 1: Rallies and consolidations (Rally, Base, Rally - RBR)

• Buyers push prices higher (Rally)
• Some sellers take profits, causing consolidation (Base)
• Good news arrives, buyers return strongly, pushing prices higher again (Rally again)
• Strategy: Buy at breakout points

Scenario 2: Drops and consolidations (Drop, Base, Drop - DBD)

• Sellers push prices down (Drop)
• Buyers see lower prices and buy, causing consolidation (Base)
• Bad news arrives, sellers intensify, pushing prices lower again (Drop again)
• Strategy: Sell at breakdown points

Beware of events that blow up the Equilibrium

Sometimes, the price equilibrium can be shattered suddenly if major factors come into play:

• Central bank interest rate announcements: Can change the entire market trend
• Company earnings (Earnings): Announcements versus expectations; differing opinions cause volatility
• Regulatory changes: New policies from stock exchanges or regulators
• Global events: Wars, pandemics, political upheavals

At these points, normally quiet markets become “chaotic,” with increased trading news, volatility spikes, and demand and supply becoming unclear.

Price adjustment in the market: Long-term vs short-term perspectives

Long-term (Fundamental): Long-term investors look at demand and supply through valuation: “Will this company grow?” If yes, demand will not only increase today but over many years.

Short-term (Technical): Traders focus solely on price: “Is demand or supply stronger right now?” If demand is strong, buy; if supply is strong, sell.

Both perspectives are valid, just on different time scales.

Summary: Why are demand and supply important

Whether you are a beginner investor or an experienced trader, understanding what demand is will help you:

✓ Understand why prices move ✓ Better analyze entry points and stop-loss levels ✓ Make investment decisions based on reason, not emotion ✓ Recognize opportunities and filter out false signals

Learning time does not have to be long; just observe real price movements on candlesticks and support/resistance levels. Practice through (Paper Trading) or low-risk live accounts. When demand and supply move, prices will no longer be a mystery.