Stock prices truly fluctuate based on supply and demand, along with timing the buy and sell actions to make a profit.

If you look at a stock chart and wonder why the price jumps or plunges like that, the simple answer is supply and demand. When more people want to buy than want to sell, the price goes up. Conversely, if more people are selling than buying, the price drops. This is the game played every day in the financial markets.

How to understand supply and demand

Demand is the buying power — the number of people and money waiting to purchase shares. Supply is the selling power — the amount of shares people want to release for sale.

By examining the relationship between price and volume, you’ll see a clear path:

• When the price is low, more people want to buy (demand increases)
• When the price is high, sellers want to release more shares (supply increases)

When both sides meet at a point called equilibrium, the price stops moving — until new factors come in to shift the balance.

What causes supply and demand to change

In the real market, things are much more complex:

Demand side (causes people to want to buy)

• Low interest rates → people invest more in stocks
• Good news about company profits → increased confidence
• Plenty of liquidity in the system → enough money to buy
• Expectations of economic growth → attracting investors

Supply side (causes people to want to sell)

• Companies issuing more shares (new offerings) → increased supply
• New IPOs → more stocks available in the market
• Bad news about profits → shareholders rush to sell
• Increased tax policies → higher production costs

Real-world example: stock price moves due to supply and demand

Imagine this scenario:

Uptrend (Demand > Supply) When good news comes out, such as a company announcing record profits, buyers rush in. The price begins to rise. Investors who think it’s still too expensive may hold back from selling, while buyers are willing to pay higher prices to get shares → the price continues to float upward.

Downtrend (Supply > Demand) When bad news hits, shareholders rush to exit at lower prices. The falling price discourages new buyers, fearing further declines. These sellers release shares at lower prices, causing the price to keep dropping.

How traders use supply and demand to time their trades

1. Identify support and resistance levels

• Support (Support) = price levels where buyers are waiting (demand is waiting to buy)
• Resistance (Resistance) = price levels where sellers are waiting (supply is waiting to sell)

When the price bounces off support, it signals that demand remains strong, making it a good buy point. Conversely, if the price breaks through resistance, it indicates demand is weakening, and caution is advised.

2. Observe buying and selling pressure through candlesticks

• Large green candlestick = demand wins, bullish signal
• Large red candlestick = supply wins, bearish signal
• Doji candlestick (close near open) = equal strength on both sides, price may fluctuate

3. Demand and Supply Zone Trading

This is a technique popular among traders today. When the price:

• Rallies quickly (Rally) → pauses in a base zone (Base) → continues rallying (Rally) = DBR (Demand) buy when it breaks higher
• Drops sharply (Drop) → pauses in a base zone (Base) → continues dropping (Drop) = SBD (Supply) sell when it breaks lower

The key moment is when the price breaks out of the consolidation zone with higher volume, indicating a renewed force in that direction.

Summary: supply and demand are the language of price

You don’t need to be an economist to understand why stocks go up or down. Just think simply:

• More buyers → price ↑
• More sellers → price ↓
• Equal supply and demand → price consolidates

The strength of understanding supply and demand is that you can predict price movements before they happen, rather than reacting after the fact. Try applying this to the stocks you plan to trade, observe where the price bounces, and what factors drive the moves. This way, you can dispel worries and trade more confidently.