Why do traders need to understand supply and demand in order to make a profit

Many people may have heard the phrase “supply and demand affect prices” but do not understand what this concept truly means and how it is important for trading. In fact, this principle is a key to predicting price movements of stocks.

Supply and demand cause price changes, not for other reasons

When we talk about “demand,” it is the quantity of goods that buyers want at different prices. “Supply” is the quantity of goods that sellers are willing to offer at different prices. The key point is that when more people want to buy (demand) than are willing to sell (supply), the price will rise. Conversely, when more people want to sell (supply) than want to buy (demand), the price will decrease.

This is a fundamental principle that never changes, whether we are talking about stocks, commodities, or cryptocurrencies.

Demand curve, supply curve, and equilibrium point

When we plot consumer demand on a graph, we get the (Demand Curve), which slopes downward because higher prices make people want to buy less. The (Supply Curve) slopes upward because higher prices motivate sellers to sell more.

The point where both lines intersect is called the “equilibrium point,” which is the most stable price and quantity because:

• If the price is above the equilibrium point, excess inventory causes the price to adjust downward.
• If the price is below the equilibrium point, shortages occur, causing the price to rise.

Prices will fluctuate around this point constantly.

Factors that influence demand

• Market liquidity - When there is a lot of cash in the system, investors tend to want to invest more, increasing demand.
• Investor confidence - When economic growth is expected, people are willing to buy stocks at higher prices.
• Interest rates - Low interest rates increase inflation, prompting investors to buy stocks instead of holding cash.
• Company performance - If profit prospects are good, the number of people wanting to buy stocks increases.

Factors that influence supply

• Company policies - Increasing capital or share buybacks change the number of shares in the market.
• IPO of new companies - New companies entering the market increase the number of securities.
• Production costs - Higher costs discourage producers from manufacturing and selling.
• Legal restrictions - Regulations of the stock exchange may limit share sales.

How to analyze stocks using supply and demand

Method 1: Look at candlesticks (Candlestick)

Green candlestick (Close price higher than open) indicates strong demand, buyers win, and prices are likely to continue rising.

Red candlestick (Close price lower than open) indicates strong supply, sellers win, and prices are likely to fall.

Doji (Open and close are the same) means both sides have equal strength, and the price is in a wait-and-see state.

Method 2: Look at trends (Trend)

If the price makes new highs repeatedly = demand is strong, buying pressure.

If the price makes new lows repeatedly = supply is strong, selling pressure.

If the price fluctuates within a range = unclear, wait for a clearer signal.

Method 3: Find support and resistance levels

Support (Support) is a level where many want to buy; if the price drops to this point, it often bounces back.

Resistance (Resistance) is a level where many want to sell; if the price reaches this point, it often reverses downward.

Demand Supply Zone technique for timing trades

Traders use this technique by identifying points where the market is heavily unbalanced and entering at the moment the price reverses.

Reversal trading (Reversal)

DBR: Drop-Base-Rally (Bullish)

• Price drops sharply (Drop) = heavy supply
• Then pauses (Base) = battle between buyers and sellers
• Price rises (Rally) = demand returns strongly
• Entry: at the breakout of the resistance of the consolidation range

RBD: Rally-Base-Drop (Bearish)

• Price rises sharply (Rally) = heavy demand
• Then pauses (Base) = battle occurs
• Price drops (Drop) = heavy supply returns
• Entry: at the breakout of the support of the consolidation range

Trend continuation trading (Continuation)

RBR: Rally-Base-Rally (Bullish continuation)

• Price rises, then pauses and consolidates
• Decision to go higher again = demand is strong
• Entry: at the breakout of resistance

DBD: Drop-Base-Drop (Bearish continuation)

• Price drops, then pauses and consolidates
• Decision to go lower again = supply is strong
• Entry: at the breakout of support

Things to remember

Supply and demand are what drive prices; nothing mysterious. Understanding when people want to buy (demand) and when they want to sell (supply) means you understand the market.

Those who can time the shifts between supply and demand are the winners in the market because they act before the crowd realizes it.