Demand and Supply Rules: Why Do Investors Need to Understand Them?

Many investors try to find secret formulas for making profits in the stock market, but they may forget that what drives the prices of all assets are the buying and selling forces constantly colliding. The demand and supply theory is the key that clearly explains this. Once you understand it, timing your buy and sell actions becomes much easier.

How are prices determined?

In financial markets, stock prices do not happen by chance. They result from a balance between two forces:

Buy Side (Demand) - People want to buy stocks. When they see an opportunity or hear good news, they will bid higher to secure the purchase. The more people eager to buy, the higher the price.

Sell Side (Supply) - People want to sell stocks. When prices are high or they fear prices will fall further, they will lower their asking price. The more people wanting to sell, the lower the price.

When buying and selling forces meet and reach equilibrium, that point is called (Equilibrium) — the price that should be at that moment.

Using demand and supply theory to time your trades

Instead of just talking about theory, let’s look at how traders actually use it daily.

Tool 1: Reading Candlestick Charts (Candle Stick)

A green candlestick indicates that buying pressure has overtaken selling pressure during that period. Buyers are willing to pay higher prices. This may signal additional demand.

A red candlestick indicates that selling pressure has won. Sellers lower their prices to attract buyers. This is a sign of excess supply.

Doji candles (opening and closing prices nearly the same) suggest that both sides are fighting evenly. It’s unclear who will win.

Tool 2: Support & Resistance (Support & Resistance)

Support - A price level where buyers are waiting to purchase at a good price. It indicates demand ready to push prices higher.

Resistance - A price level where sellers are waiting to sell when prices are high enough. It indicates supply eager to sell.

When the price breaks above resistance, it shows strong buying pressure. Conversely, if it breaks below support, it indicates strong selling pressure.

Tool 3: Trading Demand and Supply Zones (Using Reversal and Continuation)

This is what professional traders use, based on price movements.

DBR (Demand Zone Drop Base Rally) - Price drops rapidly (Drop) due to excess selling. Then, buying from the lows pushes the price back up, oscillating within a range (Base). When buying finally wins, the price breaks out upward (Rally), and traders buy at this breakout point.

RBD (Supply Zone Rally Base Drop) - Similarly, but in reverse. Price rises rapidly (Rally) due to excess buying, then consolidates, and when selling pressure overtakes, the price plunges (Drop). Traders sell at this downward point.

RBR (Rally Base Rally) - Price rises (Rally) and continues upward, oscillating gently (Base) before rallying again (Rally), indicating strong buying momentum.

DBD (Drop Base Drop) - Price plunges (Drop) further, oscillates gently, then continues downward, showing persistent selling pressure.

What factors influence demand in the stock market?

Macroeconomic factors - Low interest rates = people lose interest in deposits and buy stocks instead, increasing demand. Conversely, high interest rates = people prefer deposits, decreasing demand.

Liquidity - When the system has abundant money, investors with cash can buy more, boosting demand.

Confidence - Good news makes people bid higher; bad news causes hesitation and reduces demand.

What factors influence supply?

Corporate policies - Stock buybacks = supply decreases (fewer stocks in the market). Capital increases = supply increases (more stocks in the market).

New IPOs - New companies listing shares = more securities in the market, increasing supply.

Regulations - Market rules may restrict sales, reducing supply.

From theory to practical application

Fundamental analysis - They believe that if a company performs well, people will want to buy (demand increases), and prices will go up. Conversely, poor performance leads to less buying (demand decreases), and prices fall.

Technical analysis - Traders observe price movements and trading volume to predict where reversals or continuations will occur, timing their entries and exits accordingly.

Key takeaways

The demand and supply rule is not just an economic theory. For investors, it’s a tool that tells you which side currently has the upper hand. Once you understand these forces, your buy or sell decisions will be more reasoned, not just guesses.

Learning this isn’t difficult if you experiment, apply it, and keep observing real price movements. Then you will see how demand and supply rules work in actual markets.