Why are supply and demand the foundation of successful investing

When we look at stock prices going up or down, deep down it’s not just the numbers changing, but the result of the forces of buyers and sellers colliding in the market. Investors need to understand that demand is the desire to buy, and supply is the desire to sell. These two forces work together to determine the appropriate stock price.

Stock analysis starts with understanding market forces

In every market phase when new information comes out, investors make immediate decisions to buy or sell. Buyers who see opportunities are willing to pay higher prices to acquire shares, while sellers may lower their prices to sell quickly. This situation is called an “imbalance” (Imbalance) and is the point where prices begin to move clearly.

If we misinterpret and think that stock prices increase because the intrinsic value of the company has risen, then decide to invest based solely on that, profits may be lost. Conversely, if we understand demand and supply forces, we will know when the price is likely to change direction, allowing us to buy at lower prices or sell before prices drop.

Demand and its inverse relationship with price

Demand is the desire to purchase a product at various quantities and different price levels. When prices fall, buyers tend to want to buy more because:

Income effect - When prices decrease, the remaining money in buyers’ pockets increases, enabling them to buy more.

Substitution effect - Lower prices make this product more attractive compared to others, leading people to switch and buy this product instead.

In financial markets, many factors generate demand, whether it’s a strong economy, low interest rates, abundant liquidity, or good news about a company. All these encourage investors to buy more stocks.

Supply and the forces pushing prices down

Supply is the desire to sell a product at various quantities and different price levels, opposite to demand. When prices rise, sellers tend to want to sell more because:

At higher prices, sellers see it as a good opportunity to realize profits, so they offer more. In stock markets, major shareholders might take this opportunity to sell off their holdings.

Additionally, factors such as a company issuing new shares (new share issuance), economic concerns, or negative news about the business all increase (selling pressure).

The point where prices stabilize: the equilibrium point between forces

Where the demand and supply curves intersect is called equilibrium (Equilibrium). Prices in the market are most stable here because:

• If prices are above this point, sellers are eager to sell, but buyers hesitate, leading to excess supply, and prices tend to fall back to equilibrium.

• If prices are below this point, buyers are eager to buy, but sellers reduce their offerings, leading to shortages, and prices tend to rise back to equilibrium.

This equilibrium point is not fixed; when new information arrives (such as better-than-expected earnings or new central bank policies), the equilibrium shifts, causing prices to move toward a new balance.

Deep factors controlling buy and sell forces in the market

Variables controlling demand (buying pressure)

Macroeconomics: When the economy is growing well, companies earn more profits, encouraging investment. Low interest rates further boost demand because savings are less attractive, prompting people to shift funds into stocks.

Liquidity: When large amounts of money flow into the market (via central bank quantitative easing or foreign capital inflows), investors have more funds available to invest.

Confidence: Good news about the economy or geopolitical stability makes investors more willing to buy stocks.

Variables controlling supply (selling pressure)

Corporate decisions: When companies buy back shares (Buyback) or issue new shares (IPO or Rights Offering), it directly affects supply.

Regulations: Restrictions on major shareholders selling shares (such as Silent Period after IPO) reduce supply in the market.

Production costs: If costs increase, companies may be less willing to expand, impacting supply.

How to use demand and supply in fundamental analysis

The investor community often uses this principle:

Good news ↔ Increased demand ↔ Rising prices: When there’s news about a company pioneering new business or better-than-expected earnings, investors believe the intrinsic value (Intrinsic Value) of the company has increased, so they are willing to buy at higher prices. Sellers hold back, and ultimately, prices rise.

Bad news ↔ Increased supply ↔ Falling prices: Similarly, negative news about competition or losses makes investors think the future is bleak, leading them to sell. Buyers hold back, and prices decline.

Technical tools to read demand and supply forces

Candlestick Analysis(

Green candlestick )Close > Open(: Indicates strong buyers during that period; demand is high.

Red candlestick )Close < Open(: Indicates strong sellers; supply is high.

Doji )Open ≈ Close(: Shows that buying and selling forces are equal; it’s unclear who will dominate.

) Long-term trend analysis ###Trend Analysis(

Prices making new highs repeatedly suggest demand remains strong; an uptrend continues.

Prices making new lows repeatedly suggest supply is heavy; a downtrend persists.

Prices moving within a range )Range-bound( indicate consolidation; wait for new catalysts.

) Support & Resistance levels ###Support & Resistance(

Support: Price level where investors see value and are willing to buy, causing the price to bounce upward.

Resistance: Price level where investors see it as expensive and are willing to sell, causing the price to bounce downward.

Demand Supply Zone: trading technique based on market forces

Professional traders often use Demand Supply Zones to catch turning points in price. The steps are:

) Step 1: Wait for an impulse move ###Impulse Move(

When news or new data arrives, prices tend to move strongly in one direction without pause. This is called an Impulse Move. If upward = Demand Zone; if downward = Supply Zone.

) Step 2: Consolidation area ###Base(

After a strong move, prices consolidate within a range as opposing forces clash. During this phase, small candles indicate traders are waiting.

) Step 3: Breakout ###Breakout(

When new data arrives, one side’s force wins, and prices break out of the consolidation and continue in the same direction.

Uptrend trading )Rally(:

• Price rises )buying pressure(
• Consolidates and forms a base
• Breaks out of the base and continues upward
• Enter long at the breakout point with a stop loss at the base

Downtrend trading )Drop(:

• Price drops )selling pressure(
• Consolidates and forms a base
• Breaks down from the base and continues downward
• Enter short at the breakout point with a stop loss at the base

Real example: Using Demand Supply Zones in stock trading

Bullish scenario )DBR - Demand Zone Rally Base Rally(:

Suppose stock ABC drops from 50 to 40 in a short period. Investors see this as an opportunity and start buying, creating a Demand Zone at 40. Later, good news about debt repayment boosts confidence, and the price moves from 40 to 48 )Rally(.

At 48, some sellers decide to exit, causing a pause in the 46-48 range )Base(. Subsequently, an advertisement for a new product line pushes the price above 48, continuing upward to 55 )Rally again(.

Traders who bought at breakout above 48 )Breakout( will profit from 48 to 55.

Bearish scenario )RBD - Supply Zone Rally Base Drop(:

Stock XYZ rises from 30 to 38. Major sellers see the high price and decide to sell, creating a Supply Zone at 38. The price consolidates in the 36-38 range.

Later, news about a competitor’s better product causes concern, and the price breaks down from 36 to 28.

Traders shorting at the breakout below 36 )Breakout( will profit from 36 to 28.

Advice: How to improve accuracy using this principle

1. Check multiple factors: Instead of relying solely on candlestick patterns, add more data such as trading volume )Volume(, RSI )RSI(, or fundamental analysis of the company.

2. Manage risk: Always set stop-loss orders to ensure losses are limited to acceptable levels.

3. Practice with historical data )Backtesting(: Test the principle on past charts to see which breakouts are genuine. This helps identify false signals.

Summary

Demand is the desire to buy; supply is the desire to sell. These two forces are the main motors of stock prices every day. Whether you are a beginner or a pro, understanding this fundamental is essential to truly grasp the market.

If you try to trade or invest without understanding these forces, it’s like navigating in a dark room. From now on, when you see candlesticks or price changes, ask yourself, “What are demand and supply doing right now?” Answering this question will help you anticipate where prices are headed next.