Why do traders need to understand what demand and supply mean? The answer lies in market reading.

When it comes to predicting stock price movements, many investors often struggle with the question, “Why do prices go up or down?” The answer lies in the fundamental concept called demand, which refers to buying interest, and supply, which is selling interest. These two terms are viewed as essential tools that can help you read the market’s mind and make appropriate investment decisions.

What does demand mean? Look at “buying desire” to understand

Demand refers to the quantity of goods or services that buyers are willing to purchase at various prices. When we look at the stock market, demand is the number of buyers willing to buy shares at a certain price.

If stock prices fall, buying interest usually increases because buyers see it as a good opportunity. Conversely, when prices rise, the number of willing buyers tends to decrease. This phenomenon is called the Law of Demand, which explains that “price and quantity demanded have an inverse relationship.”

Why is this so? There are two main reasons:

1) Income Effect (: When prices decrease, the value of your money increases in real terms. You can buy more with the same amount of money.

2) Substitution Effect ): If this stock becomes cheaper compared to other stocks, investors tend to switch and buy this one instead.

Besides price, demand also depends on several factors such as the buyer’s income, confidence in the future economy, market sentiment, and future price expectations.

What is supply? It is the counterforce to “buying interest”

If demand refers to the willingness to buy, supply is the willingness of sellers to sell. When prices increase, sellers are more eager to sell because they see it as a good opportunity to realize profits.

The Law of Supply states that “price and quantity supplied have a direct relationship,” meaning that as price increases → willingness to sell increases.

Production costs affect the supply side. If costs rise, sellers may reduce the quantity they are willing to supply or require higher prices to be profitable. In the stock market, factors such as a company’s ( capital increase or share buybacks ), entry of new companies, and regulatory changes all influence supply.

Market equilibrium: where the actual price occurs

Simply buying and selling forces alone are not enough. The actual market price results from both parties meeting. When the quantity demanded equals the quantity supplied, we call that point (Equilibrium ).

At equilibrium, prices tend to stabilize because:

• If the price is above equilibrium: sellers will offer more, but buyers will hold back → excess supply → price must decrease.
• If the price is below equilibrium: buyers want to buy more, but sellers cannot sell → shortage → price must rise.

Therefore, the market has an inherent mechanism that encourages prices to return to equilibrium.

In financial markets, what factors drive demand and supply?

( Factors that increase demand )Buyers’ interest ###

• High liquidity: When there is abundant money flowing in the system, investors have more cash, increasing demand for risky assets.
• Low interest rates: When saving in banks yields little, investors turn to buy stocks more.
• Increased confidence: Good news from companies, strong performance, or new growth opportunities encourage investors to buy more.
• Positive expectations: If economic growth is anticipated, people are more willing to invest.

( Factors that increase supply )Sellers’ interest ###

• Companies decide to raise capital: The number of shares in the market increases → supply increases.
• New companies entering the market (IPO ): New shares flow into the market, increasing supply.
• Negative news: Reports of company problems or poor earnings → shareholders want to sell.
• Fear of risk: When the market or economy is uncertain, investors tend to sell quickly.

How to use demand and supply in trading: Reading signals from candlesticks

( 1. Green vs. Red Candlesticks

Green candlestick )Close price higher than open price###: Indicates buying pressure wins; investors are willing to pay higher prices.

Red candlestick (Close price lower than open price): Indicates selling pressure wins; investors want to exit.

Doji candlestick (Open and close prices nearly equal): Shows demand and supply are balanced; the market is uncertain about the next move.

( 2. Support and Resistance: The signatures of demand and supply

Support: A level where buyers often wait to buy; when the price reaches this point, buying interest tends to return.

Resistance: A level where sellers often wait to sell; when the price reaches this point, selling pressure tends to come in.

) 3. Demand Supply Zone: Popular trading technique

When prices move rapidly up or down ###showing excess demand or supply###, then pause within a range, the price may reverse or continue the trend depending on new factors.

Demand Zone Drop Base Rally (DBR ): Price drops, forms a base, then rises ← Buying opportunity.

Supply Zone Rally Base Drop (RBD ): Price rises, forms a base, then falls ← Selling opportunity.

Practical application: How to trade wisely?

1. Observe candlesticks and market sentiment: If you see a large green candlestick with a breakout above resistance, you know a breakout attempt is happening → another buying opportunity.

2. Set support and resistance levels: Remember points where prices often bounce; these are your demand and supply zones.

3. Wait for a new equilibrium: Don’t rush. When the price pauses within a range, wait for new factors to emerge. Otherwise, you may get lost.

4. Manage risk: Always set a (Stop Loss ) point, because the market may move in an unexpected direction.

Summary: Why is understanding demand and supply important?

Demand refers to the willingness to buy, and supply is the willingness to sell. Both create a balance (equilibrium ) that determines the price.

Investors can apply this concept in two ways:

• Technical approach: Read candlesticks, identify support and resistance, follow Demand Supply Zones.
• Fundamental approach: Evaluate news and events affecting demand and supply.

Regardless of the method, the key is to study diligently and maintain trading discipline. The market teaches lessons to those willing to learn from it.