How do stock prices move? The real factors are supply and demand.

When observing stock prices rising, falling, or moving aimlessly in the market, have you ever wondered what forces are behind these movements? The answer is Supply (Supply) and Demand (Demand) — the two fundamental forces that make prices dance. Understanding them well allows you to see through what most traders miss.

What Exactly Are Demand and Supply?

To simplify as much as possible, Demand (Demand) = the desire to buy and Supply (Supply) = the desire to sell — nothing more complicated.

When these two forces are plotted on a price and volume chart, they form two lines: one sloping upward (Supply), and the other downward (Demand). Their intersection point — called Equilibrium (Equilibrium) — is where price and trading volume pause temporarily.

Why do they pause? Because at that point:

• If the price goes up: sellers increase supply, but buyers slow down → excess supply → price must fall.
• If the price goes down: buyers increase demand, but sellers withdraw → shortage → price must rise.

Demand: The Rule of Falling Prices

The law of demand states that demand is inversely related to price — as price rises, demand falls; as price drops, demand increases. This is driven by two main factors:

Income Effect (Income Effect): When prices fall, the real value of your money increases, so you can buy more.

Substitution Effect (Substitution Effect): When good A becomes cheaper relative to good B, you switch to buying A.

Other factors influencing demand include:

• Consumer income
• Prices of related goods
• Tastes and preferences
• Number of consumers
• Future price expectations
• Seasons, government policies, technology, and confidence

Supply: The Rule of Rising Prices

Supply moves opposite to demand — as prices increase, sellers are willing to supply more; as prices decrease, they supply less, because:

• Higher prices mean higher profit per unit, encouraging producers to produce more.
• Lower prices mean thinner margins, prompting producers to cut back or shift resources elsewhere.

Other factors affecting supply:

• Production costs
• Prices of substitute goods
• Number of competitors
• Technology
• Future price expectations
• Weather, tax policies, exchange rates, and access to capital

In Financial Markets, Demand and Supply Are Much More Ruthless

In stock markets, demand and supply fluctuate wildly, influenced by complex and interconnected factors.

Demand for stocks increases when:

• The economy is strong, and interest rates are low → investors seek higher returns in stocks.
• Financial system liquidity is high → money flows in.
• Confidence is high → good earnings and positive outlooks.

Supply of stocks increases when:

• Companies decide to raise capital → new shares enter the market.
• New IPOs occur → more securities available.
• Regulations change → selling restrictions loosen.

The True Driver of Price Movement Is the Imbalance Between These Two Forces

Stock markets operate at equilibrium, but that equilibrium is never static. It’s like a balanced rock constantly tilting:

• When demand exceeds supply: → Buyers outnumber sellers → price 📈
• When supply exceeds demand: → Sellers outnumber buyers → price 📉
• When both are equal: → Price stalls within a range, with no clear direction.

This is the foundation of everything traders observe on charts.

How to Trade Demand and Supply Zones — Real-Life Examples

Technical traders often use the “Demand Supply Zone” technique to time their entries and exits. It works like this:

( 1. When the price plunges after bad news )Supply wins###

Summary:

• Price drops sharply (Drop) — heavy selling
• Consolidates at the bottom (Base) — buyers start accumulating
• Eventually, buying pressure pushes the price up strongly (Rally) — reversal

This pattern is called Demand Zone Drop Base Rally (DBR). Traders buy at the point where the price breaks above the previous high.

( 2. When the price surges after good news )Demand wins###

Opposite scenario:

• Price rises sharply (Rally) — heavy buying
• Consolidates at the top (Base) — sellers start to relax
• Then, at some point, selling intensifies and the price drops sharply (Drop) — reversal

This pattern is called Supply Zone Rally Base Drop (RBD). Traders sell at the point where the price breaks below the previous low.

( 3. When the trend continues, demand or supply remains strong

If good news persists, demand stays strong:

• Price continues upward )Rally### → pause (Base) → rally again (Rally)

This is called Rally Base Rally (RBR), indicating an uptrend.

If bad news persists, supply remains strong:

• Price continues downward (Drop) → pause (Base) → drop further (Drop)

This pattern is called Drop Base Drop (DBD), indicating a downtrend.

Using Demand and Supply in Fundamental Analysis

Fundamental analysts view demand and supply from a different perspective:

Stock price = the demand for that company (Supply is how many shares are available), and the factors that influence investor sentiment include:

• Quarterly earnings
• Growth forecasts
• Changes in business structure

Good news: → Investors want to hold → demand increases → willing to buy at higher prices → price 📈 Bad news: → Investors want to sell → supply increases → willing to sell at lower prices → price 📉

Using Demand and Supply in Technical Analysis

Technical traders interpret demand and supply directly from candlestick patterns and price movements:

1. Candlestick Price Action:

• Large green candle = strong demand, buyers in control
• Large red candle = strong supply, sellers in control
• Doji (Open and close at the same level) = indecision, no clear trend

2. Market Trend:

• Higher highs = demand remains strong, price uptrend
• Lower lows = supply remains strong, price downtrend
• Moving sideways = balance, unclear direction

3. Support & Resistance:

• Support = demand zone, price unlikely to fall below
• Resistance = supply zone, price unlikely to break above

Factors Behind Demand and Supply That Investors Often Miss

Beyond price, several other factors should be observed:

Demand side:

• Macroeconomic policies
• Money supply
• Market confidence

Supply side:

• Companies issuing new shares
• Management share buybacks
• New IPOs
• Regulatory changes

Summary: What Are Demand and Supply, and Why Are They Important?

Demand (Demand) = buying pressure Supply (Supply) = selling pressure Price = the result of the clash between these two forces

Whether you invest fundamentally or trade technically, understanding that price moves due to the imbalance of demand and supply helps you see through many things others miss.

The next step is applying this understanding to real market prices. It seems simple, but it requires lots of practice to master.