Why do traders need to understand supply and demand to beat the market?

Financial markets may seem volatile and unpredictable, but in reality, stock price movements follow clear economic principles. That is, demand (Demand) refers to the desire to buy and supply (Supply) refers to the desire to sell. With a deeper understanding, you will see that almost everything in stock prices can be explained by these fundamental principles.

What are Demand and Supply? For Traders

Before discussing applications, let’s understand the basics first.

Demand (Demand) is the quantity of a product that buyers want to purchase at various prices. When plotting the relationship between price and quantity, you get the (Demand Curve), which always slopes downward because:

• Income Effect (Income Effect): Price drops → your real money value increases → buy more
• Substitution Effect (Substitution Effect): Price of this product decreases → compared to other products → more attractive to buy

In the stock market, demand increases when:

• Interest rates are low (more liquidity)
• Company performance is good
• Investor confidence is high
• Positive news is present

Supply (Supply) is the quantity of a product that sellers want to offer at various prices. When plotted, it produces the (Supply Curve), which always slopes upward because:

• Higher prices → sellers are willing to sell more (more profit)
• Lower prices → sellers sell less (risk of loss)

In the stock market, supply increases when:

• Companies issue new shares (new share issuance)
• New IPOs occur
• Major shareholders want to sell
• Negative news causes investor fear

Equilibrium (Equilibrium) occurs at the intersection of demand and supply lines. This is the price the market accepts at that moment. When deviating from this point:

• If the price is too high → supply exceeds demand → price is pushed down
• If the price is too low → demand exceeds supply → price is pushed up

Factors Driving Demand in the Stock Market

The desire to buy stocks is not just luck; many factors work together:

Market Liquidity - When central banks cut interest rates, large amounts of money flow into the stock market because bank deposits yield less

Economic Outlook - If economic growth is expected to be strong, investors tend to enter the market

Consumer Confidence - Market sentiment has a greater impact on investment than expected

News and Information - Negative news about a company causes immediate price drops as investors flee

Factors Driving Supply in the Stock Market

The amount of stocks in the market is not fixed but changes based on various conditions:

Company Capital Increase - When a company issues more shares, supply increases immediately, which may push prices down

Share Buybacks - Conversely, buybacks reduce supply, potentially pushing prices up

New IPOs - New companies entering the market often increase supply temporarily

Major Shareholders’ Policies - Silent periods after IPOs restrict sales; once over, supply may increase if they decide to sell

How Traders Use Demand and Supply for Fundamental Analysis

When you see stock prices rising, you are essentially observing the tug-of-war between buyers and sellers.

If stocks rise rapidly, it indicates investor optimism, expecting the company to grow. Buyers are willing to pay higher prices, while sellers hold back.

Conversely, if prices fall sharply, it signals concern, possibly due to:

• Disappointing earnings
• Economic slowdown expectations
• Internal management issues

These fundamental factors change → demand and supply change → prices adjust accordingly.

Demand and Supply in Technical Analysis

Technical traders interpret demand and supply through various tools:

Candlestick Charts (Candle Stick)

• Green candles (Close higher than open): strong buying, demand wins
• Red candles (Close lower than open): strong selling, supply wins
• Doji (Open-close near each other): balance between demand and supply, signal to wait for new signals

Market Trends (Market Trend)

• Making new highs: demand dominates, bullish trend persists
• Making new lows: supply dominates, bearish trend persists
• Price within a range: balanced demand and supply, waiting for new catalysts

Support & Resistance (Support & Resistance)

• Support: where buyers are (demand), price tends to bounce up
• Resistance: where sellers are (supply), price tends to retreat

Practical Demand Supply Zone Trading Strategies

Many traders use the Demand Supply Zone technique to catch market turns by looking for four scenarios:

Uptrend: Drop-Base-Rally (DBR) (Drop-Base-Rally)

Price drops sharply → forms a base → breaks above resistance

• Demand Zone: where buyers wait to buy
• Trade: buy on breakout

Downtrend: Rally-Base-Drop (RBD) (Rally-Base-Drop)

Price rises → forms a base → breaks below support

• Supply Zone: where sellers wait to sell
• Trade: sell on breakdown

Uptrend continuation: Rally-Base-Rally (RBR) (Rally-Base-Rally)

Price rises → forms a base → continues upward (due to strong demand)

• Trade: buy on breakout continuation

Downtrend continuation: Drop-Base-Drop (DBD) (Drop-Base-Drop)

Price drops → forms a base → continues downward (due to strong supply)

• Trade: sell on breakdown continuation

Key Points for Traders

1. Demand and supply are not static New factors can emerge at any time: good or bad news, economic data, monetary policies—all can instantly change trading dynamics.

2. Equilibrium is not a fixed number Stock prices are constantly moving to find new equilibrium. Understanding these shifts is central to successful trading.

3. Combine Fundamental and Technical Analysis Analyzing (news) and (price-volume) together provides better decision-making.

4. Price movements are results of market surveys It’s not just theory; demand and supply are visible on daily price charts. Observe candlesticks, trends, and volume changes.

Summary

Demand and supply are not just classroom theories but are the mechanisms that drive stock prices at every moment. Investors who understand these principles will see the market differently—not just as numbers but as a tug-of-war between buyers and sellers, resistance and support, news and confidence.

When (demand) (the desire to buy) wins, prices go up; when supply (the desire to sell) wins, prices go down. These are the arrows indicating market direction. If you understand this, you will move in the same direction as the market, not against the trend.