Stock prices are not random or coincidental. Understand the market mechanism through buying and selling pressure.

When looking at stock price charts, many traders often feel confused about how prices can go higher or fall lower. In reality, all price movements are driven by a simple mechanism called “buy and sell pressure,” which is a fundamental concept in economics known as demand and supply. Let’s first understand this concept, so you can interpret price changes differently.

Understanding Market Mechanics: What Are (Demand) and (Supply)?

If asked, “What is supply,” and how it relates to price setting, the answer is that it is half of the most important equation in the market. Supply is the quantity of goods or services that sellers are willing to offer at various prices. Conversely, demand is the quantity of goods or services that buyers want to acquire at different prices.

When plotted on a graph, the demand curve tends to slope downward (as price increases, demand decreases), while the supply curve slopes upward (as price increases, supply increases). The point where both curves intersect is the equilibrium point, representing the actual market price and quantity.

Why Do Prices Change?

If demand and supply are fixed, prices tend to be stable. However, real market conditions are different. External factors cause the demand or supply curves to shift.

Factors affecting demand:

• Changes in interest rates: When interest rates decrease, investors seek higher returns in the stock market.
• Market confidence: Good news makes buyers willing to pay higher prices.
• Liquidity in the financial system: More money in the system increases investment demand.

Factors affecting supply:

• Corporate decisions: Capital increases lead to more shares; buybacks reduce shares.
• New IPOs: Listing of new companies increases market supply.
• Stock exchange regulations: Restrictions on large shareholders’ sales.

Using Demand Supply Zones in Trading

Pro traders may be familiar with the Demand Supply Zone technique, which applies the demand and supply concept to identify high-probability trading points.

Demand Zone Drop Base Rally (DBR) - Uptrend after a pullback Price drops rapidly (Drop), then forms a base (Base) where there is high buying interest. When buying pressure overcomes, the price breaks out upward (Rally). Traders enter on the breakout, setting stop-loss at the base.

Supply Zone Rally Base Drop (RBD) - Downtrend after a rally Price rises quickly (Rally), then forms a base (Base) with high selling interest. When selling pressure wins, the price plunges (Drop). Traders short at the breakout of the base.

Cutting Price Action with Buy and Sell Pressure

Besides identifying reversal points, traders can also follow trends using the same Demand Supply Zone concept.

Rally Base Rally (RBR) - Continuing uptrend Price rises rapidly, then forms a base, and rises again. This indicates strong buying pressure. Trend followers might buy on a breakout above the base.

Drop Base Drop (DBD) - Continuing downtrend Price drops rapidly, then forms a base, and drops again. This signals persistent selling pressure. Short traders see this as a good opportunity.

Training Your Eyes to Recognize Buy and Sell Pressure

The easiest way to observe buy and sell pressure is by looking at candlesticks (Candle Stick):

• Large green candle: Close higher than open, indicating strong buying.
• Large red candle: Close lower than open, indicating strong selling.
• Doji (Doji): Open and close are close together, showing indecision between buyers and sellers.

Trend analysis (Trend) also helps. If prices keep making new highs, buying pressure remains strong. If prices keep making new lows, selling pressure dominates. If prices are moving sideways within a range, buyers and sellers are pulling in opposite directions.

The Benefits of Support and Resistance

Support (Support) is a price level with strong buying interest. Many investors believe this level is valuable and likely to bounce back up if reached.

Resistance (Resistance) is a price level with strong selling interest. Many investors believe the price is overextended and are willing to sell, so if the price reaches this level, it may be pushed down.

Analyzing demand and supply is most effective when you understand what support and resistance levels truly mean.

How News Impacts Demand and Supply

News can cause the demand or supply lines to shift. Good news increases buying demand; bad news increases selling pressure.

Many investors do not sell because they are forced to; they sell because their perception of the company, earnings outlook, growth prospects, or credibility has changed.

Why Learn This?

Deep understanding of demand and supply allows you to:

• Read charts better: Instead of thinking “the price is weird,” you see “buy/sell pressure is changing.”
• Make more accurate predictions: Knowing where buying or selling pressure exists helps you anticipate where prices are headed.
• Make more reasoned investment decisions: Instead of following trends blindly, you understand whether current prices are truly fair or over/under valued.

The concept of demand and supply may sound like a school lesson, but it is the language the market speaks. The better you understand it, the more confidently you can converse with the market.