Why do financial markets move? Understand demand and supply to forecast prices accurately.

If you’ve ever wondered why stock prices fluctuate all the time, the answer lies in the clash between two forces: demand and supply, which serve as the battleground for buying and selling pressures. For serious traders, understanding this principle is not just additional knowledge but a crucial weapon in reading the market and choosing the right timing for investments.

First, what are demand and supply?

Demand and Supply are the fundamentals that determine prices in every market, elaborated as follows:

• Demand (Demand) = The desire to buy at various prices. When prices decrease, the quantity buyers want increases. When prices rise, demand decreases.
• Supply (Supply) = The willingness to sell at various prices. When prices increase, sellers are willing to offer more. When prices decrease, the selling volume drops.

Equilibrium (Equilibrium) occurs at the intersection of these two forces—where the price and quantity satisfy both buyers and sellers. At this point, the market is stable, but only temporarily, because news, sentiment, and external factors often disrupt this balance.

How do financial markets work differently?

In stock and financial asset markets, demand and supply are similar in concept but involve more complex variables:

Factors driving demand:

• Liquidity in the system (More or less circulating money)
• Investor confidence (Predicting whether the economy is good or not)
• Interest rates (Lower rates lead to more investment in stocks)
• Company performance (Better results increase demand)

Factors driving supply:

• Capital increase or share buybacks (More capital = increased supply)
• New IPOs entering the market (Supply in the market increases)
• Hidden selling by major shareholders (During Lockup Period)
• Market regulations

How to read demand and supply signals from price

1. Reading from candlesticks (Candle Stick)

• Green candle (Close > Open) = Strong buying pressure, Demand system wins
• Red candle (Close < Open) = Strong selling pressure, Supply system wins
• Doji (Open equals Close) = Both sides clash equally, unclear which way it will go

2. Reading from trend

• If prices make new highs = Demand remains strong, prices will continue to rise
• If prices make new lows = Supply remains strong, prices will continue to fall
• If prices move within a range = Both sides are balanced, wait for new factors

3. Reading from support and resistance

• Support (Support) = The level where buying pressure exists; prices tend to bounce back up when reaching here
• Resistance (Resistance) = The level where selling pressure exists; prices tend to fall after reaching here

Demand Supply Zone Technique: Practical Trading Use

This technique looks for points where the price loses balance sharply and then consolidates within a range before reversing or continuing in the same direction.

2 Main Patterns:

1) Reversal (Reversal)

• DBR (Drop-Base-Rally): Price plunges → consolidates → breaks above support
  • Enter when support is broken upward, set stop loss below support
• RBD (Rally-Base-Drop): Price rises → consolidates → breaks below resistance
  • Enter when resistance is broken downward, set stop loss above resistance

2) Continuation (Continuation)

• RBR (Rally-Base-Rally): Price rises → consolidates → continues upward
  • Enter when resistance of the range is broken upward
• DBD (Drop-Base-Drop): Price drops → consolidates → continues downward
  • Enter when support of the range is broken downward

Additional: Factors affecting demand and supply in the stock market

Macroeconomic factors:

• Economic growth and political situation
• Central bank policies (Interest rate hikes or cuts)
• Employment data, inflation

Company-specific factors:

• Financial statements, quarterly earnings
• Management announcements or M&A
• News about major executives

Market factors:

• Institutional investor fund flows
• Lock-up releases after IPO
• Trading volume and volatility

Summary

Demand and supply are not just textbook theories—they are the mechanisms that drive all price movements. Traders who can read these signals will have an advantage in predicting turnarounds. Practicing to understand buying and selling pressures through observing candlesticks, trends, and applying Demand Supply Zones will help you better time your entries and reduce risks in each trade.