Law of Supply and Demand: Why Traders Need to Understand This Principle to Be on the Right Track

Most Thai investors often hear “buying pressure and selling pressure” day after day, but few understand where they come from and how they work. The truth is, these forces are not mysterious. They are rooted in basic economic principles called Supply and Demand — the same concept used to explain the price of noodles at the corner shop with credibility just as much as it explains stock price movements in the market.

What is Demand? Why is it important for trading?

Demand simply refers to the desire to buy goods or services at various price levels. When you draw this relationship, you get the (Demand Curve), which shows that at higher prices, people want to buy less, but at lower prices, they want to buy more.

What drives this are two fundamental factors:

Income Effect — When prices fall, your money can buy more. You can purchase more shares than before.

Substitution Effect — When this stock becomes cheaper compared to others, investors turn their attention to this one more.

But demand isn’t driven by price alone. Other factors such as investors’ income, market preferences, future company forecasts, and even investor confidence can all stimulate or diminish demand.

Supply: The other half of the picture

If demand is the buying power, then Supply is the selling power — the willingness to sell goods at various price levels. Unlike demand, which moves inversely with price, supply moves in the same direction: as prices rise, sellers are willing to sell more.

The reason is simple: sellers want profits. Higher prices mean better profits.

In the stock market, supply is influenced by company decisions such as (Share Buybacks or Capital Increases), the number of competitors, new listings, and even stock exchange regulations.

Equilibrium: Where the magic happens

Demand or supply alone cannot determine the price. The actual market price you see occurs at the equilibrium — the point where demand and supply curves intersect.

At this point, there are enough sellers willing to sell as many as buyers want to buy. Price and volume remain stable until new factors come into play.

But what if the price is above equilibrium? Sellers will rush to sell, but buyers will hold back. Excess supply causes downward pressure on price toward equilibrium.

Conversely, if the price is below equilibrium, buyers will jump in to buy, but sellers won’t have enough shares to sell. This shortage pushes the price back up to equilibrium.

The relationship of supply and demand in financial markets: More complex than you think

In the world of money, supply and demand are not simple. Many factors work together:

Demand side: When interest rates fall, investors seek higher returns elsewhere, such as stocks. Market confidence, liquidity, and forecasts of corporate earnings all support demand.

Supply side: Company executives deciding to buy back shares, new IPOs, companies issuing new shares, and stock exchange regulations all affect the amount of shares available in the market.

Using the law of demand to understand stock price movements

Many successful investors are not those who read financial reports best, but those who understand “what drives buying and selling.”

Fundamental Analysis

Stocks rise? That means buyers are stronger than sellers and are willing to pay higher prices.

Stocks fall? Sellers win and start to exit.

The factors driving these changes include market expectations of profits, the company’s growth potential, and overall liquidity changes. Good news shifts perceptions, increasing demand, reducing supply, and pushing prices up.

Technical Analysis

Technical traders use many tools to visualize “supply and demand”:

Candlesticks — Green candles (Close higher than open) indicate buyers won that day; red candles (Close lower than open) indicate sellers won.

Trends — If stocks make new highs, buyers are strong; if they make new lows, sellers are still in control.

Support and Resistance — Support is where buyers are waiting to buy (Demand feels real); resistance is where sellers are waiting to sell (Supply feels real).

Real example: Timing trades with Demand Supply Zone

A popular technique is the Demand Supply Zone, which looks for periods where prices have moved away from balance and are preparing to swing back toward a new equilibrium.

Case 1: Buyers come in (Demand Zone Drop Base Rally)

Imagine: a stock drops sharply (Drop) due to intense selling, then the price stops falling and consolidates (Base) in a narrow range. This signals “okay, buyers are starting to step in.” When good news arrives, demand wins, and the price rallies to a new equilibrium (Rally).

Traders buy at the rally point, setting stop-losses below the lower boundary of the zone.

Case 2: Sellers come in (Supply Zone Rally Base Drop)

Conversely, a stock surges (Rally) because buyers are strong, then consolidates (Base) as sellers see the price as expensive. When bad news hits, supply wins, and the price plunges to a new equilibrium (Drop).

Traders sell at the drop point.

Continuation of trend

Often, prices do not reverse but continue in the same direction:

In an uptrend: rise → pause → good news → continue rising (RBR)

In a downtrend: fall → pause → bad news → continue falling (DBD)

Making money work: Know the rules of demand

Supply and demand are not just economic terms; they are practical tools that help explain “why prices change,” whether through fundamental analysis (on profits, growth, forecasts) or technical analysis (candles, trends, support and resistance).

The law of demand is used to predict, evaluate, and find good trading opportunities. Its importance lies in the fact that, regardless of your investment style (long-term or short-term), understanding how buying and selling demand work is what separates winners from losers.