Understanding supply and demand to accurately forecast stock prices

If you are an investor looking to predict stock prices before the market moves, you need to understand the fundamental forces driving prices: supply and demand—two forces that economists and traders use to explain why prices change. Every rise and fall in stock prices is rooted in the struggle between supply and demand.

The Two Forces That Control Price Movements – Supply and Demand

When it comes to supply and demand, many people might think it’s complicated, but in reality, it’s just the desire to buy and the desire to sell.

Demand is the desire of buyers. When prices go down, consumers are willing to buy more. When prices go up, they buy less. This inverse relationship is called the law of demand. Factors affecting demand include consumers’ income, substitute prices, preferences, the number of buyers, and future price expectations.

Supply is the desire of sellers. When prices rise, sellers are willing to offer more. When prices fall, they reduce the quantity supplied. This positive relationship is called the law of supply. Factors influencing supply include production costs, substitute prices that producers can switch to, technology, the number of competitors, and price expectations.

Equilibrium is the point where the demand and supply curves intersect. At this point, the price and quantity tend to be stable because when prices are above equilibrium, excess supply occurs, prompting sellers to lower prices. When prices are below equilibrium, shortages happen, and buyers are willing to pay higher prices. Prices tend to return to equilibrium over time.

Financial Markets Follow the Same Supply-Demand Rules

In financial markets, stocks and other assets are considered commodities, so supply and demand play the same role in determining prices.

Factors affecting demand in financial markets include market liquidity—more money in the system means investors have more capital to invest—and central bank interest rate policies—lower interest rates encourage more investment in stocks. Investor confidence also matters; when the economic outlook looks good, investors are more willing to take risks.

Factors affecting supply include corporate policies such as issuing new shares, share buybacks reducing circulating shares, new company listings increasing available securities, and regulations like the Silent Period that restrict share sales.

From Theory to Practice – Using Supply and Demand for Trading

Analysts use supply and demand in two ways:

First: Fundamental Analysis considers supply and demand as reflections of business performance. When management forecasts strong results, investors are willing to buy shares at higher prices (demand increases). Conversely, bad news causes investors to hold back and sell off (supply increases).

Second: Technical Analysis examines actual price movements to identify supply and demand zones:

• Candlesticks: Green candles (close > open) indicate strong demand; red candles (close < open) show strong supply; doji (open = close) suggests indecision.

• Market Trends: Making higher highs indicates demand dominance; lower lows suggest supply dominance; sideways movement indicates balance.

• Support & Resistance: Support levels are where buyers are waiting to buy (demand); resistance levels are where sellers are ready to sell (supply).

Real-Life Example – Demand Supply Zone Strategy in Stock Trading

The Demand Supply Zone technique applies this principle by identifying points where price becomes unbalanced, accelerating or plunging, then consolidating before continuing the move.

Type 1: Demand Zone (DBR) – Buy Point
Price drops rapidly (Drop) due to abundant sellers, then consolidates (Base). When good news arrives, buyers step in strongly, pushing price above the base (Rally). Traders can buy at breakout points.

Type 2: Supply Zone (RBD) – Sell Point
Price surges quickly (Rally) due to strong buying, then consolidates (Base). Bad news causes sellers to flood in, pushing price below the base (Drop). Traders can sell at breakout points.

Type 3: Continuation RBR – Uptrend
Price rises → consolidates → rises again. Buying at the consolidation area.

Type 4: Continuation DBD – Downtrend
Price drops → consolidates → drops further. Selling at the consolidation area.

Summary

Supply and demand are not complex concepts exclusive to economists. Traders and investors worldwide use these ideas daily. Imbalances between supply and demand cause price changes, and understanding this mechanism allows traders to predict movements and time their trades more effectively. The key is not just memorizing theories but applying them through real-time price tracking and continuous improvement.