How to use the law of supply and demand in the investment market: real trading examples that work

When it comes to stock price forecasting, most investors tend to focus on numbers and data. But in reality, the mechanism that drives prices is quite simple: Supply and Demand. The desire to buy versus the desire to sell, buying pressure versus selling pressure. Once you understand this principle, you’ll be able to time your trades more accurately.

Why are Supply and Demand Important?

In the financial markets, nothing is more powerful than selling pressure and buying pressure. When the number of buyers exceeds sellers, prices tend to rise. Conversely, when there are too many sellers, prices must fall. The best approach is to find the equilibrium point where supply and demand meet. That is the point where prices are most stable.

What is (Demand)?

In economics, demand is represented by the Demand Curve graph, which shows the relationship between the quantity buyers want and the price. Generally, when prices decrease, demand increases. When prices rise, demand decreases. This is the fundamental law of demand.

Factors affecting demand are not limited to price alone. Buyers’ income, preferences, psychological factors, and even news signals—both positive and negative—also influence whether people want to buy or hold back.

What is (Supply)?

Supply is the opposite of demand; it is the quantity of goods that sellers are willing to offer at various prices. When prices are high, sellers want to sell more to maximize profits. When prices decrease, sellers reduce the amount they offer because profits are lower.

In stock markets, supply factors may include corporate decisions such as capital increases, share buybacks, or new listings. Regulatory policies and production capacity also impact supply.

Equilibrium Point - (Equilibrium) - The Stable Price Point

The point where supply and demand intersect is called the equilibrium point. At this point, price and trading volume are in a stable state, with no forces pushing for change.

Imagine this scenario: if the price rises above the equilibrium point, sellers will increase their offerings, while buyers will reduce their demand, leading to excess supply and downward pressure on price. Conversely, if the price drops below the equilibrium, demand increases while supply decreases, creating excess demand and pushing prices back up. This mechanism is known as the market’s “invisible hand.”

Applying Supply and Demand in Trading

Method 1: Use Price Action to Observe Buying and Selling Pressure

By observing candlesticks (Candlestick), you can interpret the strength of buying or selling pressure. A large green candle indicates strong buying power, while a large red candle shows strong selling pressure. A doji (Doji), where open and close prices are nearly the same, suggests a battle between buyers and sellers with no clear winner.

Method 2: Find Support & Resistance (Support & Resistance)

Support is the price level where buyers are waiting to purchase, as they see the price as low enough. At this level, demand surges, preventing further decline. Resistance is where sellers are waiting to sell, perceiving the price as high enough. Here, supply increases, preventing the price from rising further.

Method 3: Demand Supply Zone - Real Trading Examples

The Demand Supply Zone technique relies on the idea that when prices move rapidly up or down, there is an excess of demand or supply. When that force weakens, prices pause and fluctuate within a range. Then, with new factors, prices break out of the range and continue the trend.

Example 1: DBR (Demand Zone Drop Base Rally) - Price drops rapidly (Drop) due to abundant supply, then forms a base (Base). When selling pressure eases and buying resumes, the price rallies (Rally). Traders can buy at the breakout point of the upper range.

Example 2: RBD (Supply Zone Rally Base Drop) - Price rises rapidly (Rally) due to high demand, forming a base (Base). When buying slows and selling pressure returns, the price drops again (Drop). Traders can sell at the breakout point of the lower range.

Example 3: RBR (Rally Base Rally) - Uptrend continues with price rising, pausing, then rising again, indicating sustained buying strength. Traders buy each time the price breaks above the resistance of the range.

Example 4: DBD (Drop Base Drop) - Downtrend persists with price falling, pausing, then falling again, showing strong selling pressure. Traders short at each breakout below the support of the range.

Applying Supply and Demand to Fundamental Analysis

From a long-term investor’s perspective, supply and demand also play a role. When positive news emerges, buying pressure increases, and buyers are willing to pay higher prices. Sellers hold back, and prices rise. Conversely, negative news reverses this: selling pressure intensifies, more sellers enter the market, and prices decline.

Summary

Supply and Demand is a fundamental concept that covers both short-term trading and long-term investing. Its applications range from observing candlestick patterns, identifying support and resistance levels, to Demand Supply Zone techniques—all centered around understanding how buying and selling forces move.

Most importantly, it’s not enough to study these concepts theoretically. You must apply them in real markets, observe daily price movements, and refine your interpretation of buying and selling pressure. As your understanding becomes clearer, your trading results will improve accordingly.