Buy Demand ( and Sell Supply ) - Price Analysis Guide for Investors

In the financial market, understanding why stock prices go up or down is essential for making prudent investment decisions. Knowing how demand and supply influence price setting is the foundation of effective analysis. This article will show how this simple economic concept can be a powerful tool for those aiming to predict price directions more accurately.

Why do investors need to understand how Demand and Supply work?

Stock prices don’t move randomly; they follow market forces. These forces are driven by two sides: buyers (demand) and sellers (supply). When a large number of buyers enter the market, demand exceeds supply, pushing prices higher. Conversely, when sellers dominate, supply exceeds demand, and prices fall.

Understanding this dynamic helps investors anticipate price movements before the majority of the market makes decisions. That’s why professional traders often observe demand-supply signals before entering new positions.

What is Demand?

Demand refers to the quantity of a product or service that buyers are willing to purchase at various prices. When plotted on a graph, it creates a “demand curve” showing how much buyers want to buy at each price level.

For example: if a stock is priced at 100 baht, some investors may want to buy 1,000 units. If the price rises to 150 baht, the number of buyers willing to purchase might drop to 500 units. This illustrates the basic demand curve.

Basic rule: Demand moves inversely with price

As prices increase, demand from buyers tends to decrease; as prices decrease, demand tends to increase. This inverse relationship is due to two reasons:

Income Effect: When prices fall, consumers’ purchasing power remains the same, but they can buy more, increasing demand.

Substitution Effect: When the price of this stock drops, it becomes more attractive compared to other investments at the same price, leading to increased demand.

Other factors influencing demand

Besides price, several factors affect demand:

• Investor income and wealth: More wealth generally leads to higher stock demand.
• Market confidence: Positive outlooks boost demand; negative news or fears reduce it.
• Prices of substitutes: If a similar stock becomes cheaper, investors may switch.
• Interest rates: Lower interest rates make stocks more attractive than savings accounts.
• Future price expectations: Expecting prices to rise encourages current buying.

What is Supply?

Supply is the quantity of a product that sellers are willing to offer at different prices. Similar to the demand curve, but in the opposite direction.

When prices rise, sellers are willing to supply more because they can earn higher returns. When prices fall, they tend to supply less.

Basic rule: Supply moves in the same direction as price

As prices increase, supply increases; as prices decrease, supply decreases. The supply curve slopes upward and to the right, reflecting this relationship.

Other factors influencing supply

• Production costs: Higher costs lead to reduced supply.
• Technology: Improved technology can increase supply by making production more efficient.
• Number of sellers: More sellers in the market increase total supply.
• Future price expectations: If sellers expect prices to fall, they may sell more now.
• Natural disasters and policies: Events like natural disasters or high taxes can reduce supply.

Price Equilibrium: where Demand meets Supply

Actual market prices are not determined by demand or supply alone but by their intersection point, called equilibrium.

At this point:

• The quantity buyers want to buy equals the quantity sellers want to sell.
• There is no pressure for the price to change.

If the price is above equilibrium, excess supply (surplus) occurs, pushing prices down. If below, excess demand (shortage) occurs, pushing prices up. This natural balancing process helps maintain market stability.

Factors affecting demand and supply in financial markets

In financial markets, demand and supply are more complex than in physical goods markets because many interconnected factors influence them.

Main factors increasing or decreasing demand

• Overall economic conditions: Growth, inflation, and interest rates influence investor appetite.
• Market liquidity: More available cash boosts demand.
• Investor sentiment: Positive news about politics, earnings, or industry prospects increases demand; negative news reduces it.

Main factors increasing or decreasing supply

• Corporate policies: Share buybacks reduce supply; issuing new shares increases it.
• Market entry: IPOs add new securities to the market.
• Regulations: Restrictions like “Silent Periods” or trading limits can restrict supply.

How to identify demand and supply signals from candlesticks and trends

Once you understand the theory, the next step is practical application. Traders can spot demand-supply signals by analyzing candlestick patterns and price trends.

Price action analysis with candlesticks

Green (Bullish) candles: Close > open, indicating buyers are in control, showing demand pushing prices up.

Red (Bearish) candles: Close < open, indicating sellers are in control, showing supply pushing prices down.

Doji candles: Open and close are nearly equal, signaling balance between demand and supply; no clear dominance.

Trend analysis

Uptrend: Higher highs and higher lows suggest strong demand and buyer willingness to pay higher prices.

Downtrend: Lower lows and lower highs indicate strong supply and seller pressure.

Consolidation: Price moves sideways within a narrow range, showing indecision; market awaits new information.

Support and Resistance levels

Support: Price level where demand is strong enough to prevent further decline; buyers tend to step in here.

Resistance: Price level where supply is strong enough to prevent further rise; sellers tend to step in here.

Trading demand-supply zones based on trend

Traders often use “Demand Supply Zones” to time entries.

1. Demand Zone Rally Base Rally (RBR) — Bullish continuation

Occurs when:

• Buyers push prices rapidly upward (Rally).
• Price pauses at a high level, forming a “Base” where demand and supply balance.
• Positive news or fundamentals strengthen demand.
• Price breaks resistance and rallies further.

Entry point: At the breakout of resistance, with a stop loss below the base.

2. Supply Zone Drop Base Drop (DBD) — Bearish continuation

Occurs when:

• Sellers push prices sharply downward (Drop).
• Price consolidates at a low, forming a base.
• Negative news or sentiment strengthens supply.
• Price breaks support and drops further.

Entry point: At the breakdown of support, with a stop loss above the base.

Practical application example

Traders observe that:

• In a clear uptrend, prices often consolidate briefly before continuing higher (RBR pattern).
• In a downtrend, prices consolidate before further decline (DBD pattern).

Entering during consolidation or at breakouts can offer high-probability setups, confirming that demand or supply remains strong.

Summary

Demand and Supply are not just simple economic theories but the underlying forces behind every price movement, whether in commodities, financial markets, or stocks.

For investors, recognizing whether demand is strong or supply is dominant helps:

• Better plan entry and exit points.
• Manage risk effectively with appropriate stop losses.
• More accurately predict price directions.

Observing demand-supply signals through candlestick patterns, trend analysis, and zones is a practical way to apply this concept. Consistent practice in reading Price Action and recognizing patterns will develop your market intuition, enabling more confident decision-making.