Demand and supply curves: The key to predicting stock price movements

New traders often ask why stock prices go up or down. The simplest answer is Demand and Supply lines, which play a key role as the main drivers of prices in financial markets. This concept is not new; it has roots in classical economics and has been widely applied in trading and investing circles.

Understanding demand and supply lines means understanding who, how many, and at what price levels are willing to buy or sell assets at any given time in the market.

What Are Demand and Supply Lines Really?

Demand (Demand): The buying pressure in the market

Demand is not just a natural desire to buy, but the quantity of goods that consumers or investors are willing to purchase at each price level. When plotted on a graph, it forms a demand curve that typically slopes downward (downward sloping), indicating that the lower the price, the more people want to buy.

This phenomenon results from two mechanisms: Income Effect (Income Effect), where a price decrease increases your real purchasing power, allowing you to buy more; and Substitution Effect (Substitution Effect), where a lower-priced good is preferred over others.

Factors boosting demand:

• Investors’ wealth and income
• Confidence in the future
• Low interest rates (Lower interest rates increase demand)
• News and market expectations
• Liquidity in the system

Supply (Supply): The selling pressure available

Supply is the quantity of goods that sellers or shareholders are willing to offer at each price level. Unlike demand, the supply curve usually slopes upward (upward sloping), meaning that higher prices encourage more selling.

Private investors often sell when they see prices are high, as if saying “Better to sell now than wait.”

Factors affecting supply:

• Production costs (For stocks, operational costs)
• Company policies (Capital increases or buybacks)
• New listings (IPOs)
• Additional securities offerings ###Offering(
• Lock-up periods after IPOs )Restrictions on major shareholders selling(

Equilibrium: The Indicator Point

The actual market price occurs where demand and supply curves intersect, called equilibrium. At this point, the number of buyers matches the number of sellers, and prices tend to stabilize.

When prices are above equilibrium, excess supply occurs )More sellers than buyers(, causing prices to fall. Conversely, when prices are below equilibrium, excess demand occurs )More buyers than sellers(, pushing prices higher.

How Demand and Supply Lines Differ in Financial Markets from Natural Goods Markets

Financial markets have special aspects:

Factors boosting demand in stock markets:

• Central bank policies )Lower interest rates mean easier money, encouraging investors to seek returns in stocks(
• Quarterly earnings reports
• Management news
• Market sentiment and psychology
• Foreign capital inflows and outflows

Factors affecting supply in stock markets:

• Stock buybacks )Reducing supply(
• Capital increases )Increasing supply(
• New IPOs )Adding supply(
• Additional securities offerings )Offering(
• Lock-up periods after IPOs )Restrictions on major shareholders###

Applying Demand and Supply Lines in Trading and Investing

( 1. Fundamental Analysis)

The inflow of buying money (drives prices up) or the outflow of selling money (drives prices down) often results from changes in expectations about a company’s profit potential.

Examples:

• Company announces higher-than-expected salaries → demand increases → price rises
• Economic slowdown expectations → investors fear → supply increases → price drops
• News about entering a new promising market → demand increases → price rises

2. Technical Analysis(

Traders use price charts to read demand and supply in real-time.

Reading candlesticks )Candlestick(:

• Green candle )Close higher than open( = Strong demand, price likely to rise
• Red candle )Close lower than open( = Strong supply, price likely to fall
• Doji )Open equals close( = Balance between demand and supply; direction is uncertain

Trend following )Trend(:

• Uptrend = making new highs )Demand wins(
• Downtrend = making new lows )Supply wins(
• Sideways = price fluctuates within a range )Demand-Supply balance(

Finding support and resistance:

• Support )Support( = The level where investors want to buy )Demand waits to buy(, prices often bounce from this point
• Resistance )Resistance( = The level where investors want to sell )Supply waits to sell(, prices often get stuck at this point

) 3. Demand Supply Zone Technique for Timing

This is a serious application of demand and supply in trading.

Scenario 1: Reversal to an uptrend ###DBR - Demand Zone Drop Base Rally(

• Initial: Many investors sell, price drops )Drop(
• Mid: Price halts at a low, investors buy, price moves within a range )Base(
• Final: Good news arrives, buying pressure wins, price reverses upward )Rally(
• Trading tip: Buy when breaking above the range, with a stop loss below the range

Scenario 2: Reversal to a downtrend )RBD - Supply Zone Rally Base Drop(

• Initial: Excessive buying, price rises )Rally(
• Mid: Price reaches high, investors start selling, price moves within a range )Base(
• Final: Bad news arrives, selling pressure wins, price drops )Drop(
• Trading tip: Sell when breaking below the range, with a stop loss above the range

Scenario 3: Continuing uptrend )RBR - Rally Base Rally(

• Buying momentum accelerates, pauses, then continues upward
• Trading tip: Follow the uptrend, buy on upward moves, cut losses below the base

Scenario 4: Continuing downtrend )DBD - Drop Base Drop(

• Selling momentum accelerates downward, pauses, then continues downward
• Trading tip: Follow the downtrend, sell on downward moves, cut losses above the base

Additional Things Investors Should Know

1. Demand and supply change rapidly New news can instantly shift demand or supply lines, causing prices to jump from old equilibrium levels.

2. It’s not easy Accurately predicting demand and supply is an art that requires practice. Good investors spend years developing this skill.

3. Combining methods Fundamental analysis + technical analysis + demand and supply = the best tools

4. Markets are not always rational Sometimes demand and supply move due to false signals or incorrect expectations, not fundamentals.

Summary

Demand and supply lines are not just economic concepts but practical tools for reading market sentiment. When you understand who wants to buy, who wants to sell, and at what prices, you can see the market picture more clearly.

Learning this requires practice: open trading accounts, simulate trades, analyze real charts, and keep experimenting until it feels natural. The effort to understand demand and supply lines is the starting point for becoming a proficient trader.