Which direction are stock prices moving? Once you understand Supply and Demand, you'll see the market differently.

When it is said that the stock market is chaotic because “demand and supply are unbalanced,” most people still do not truly understand what that really means. But if you understand this deeply, you will be able to predict price movements much more accurately, and that is the advantage of traders who truly understand supply demand.

Stock prices go up and down—who is driving this?

Before diving into complex technical analysis, let’s step back and look at the main characters in the market—buyers and sellers.

Every time the price changes, there is usually a story behind the differing levels of demand. Sometimes, when more buyers enter, prices are pushed higher. Sometimes, when sellers are more active, prices fall like a falling tower. This is the core of understanding the market.

Demand is the buying force—the desire of investors to hold that asset. Supply is the selling force—the amount of assets available to buy in the market. When demand exceeds supply, prices rise. When supply exceeds demand, prices fall.

Why are people “willing” to buy at high prices and “willing” to sell at low prices?

This is explained by economists through “income effects” and “substitution effects.”

Income effect—When prices drop, your purchasing power increases. You can buy more with the same amount of money, increasing demand.

Substitution effect—When prices fall, the asset seems less expensive compared to alternatives. Those who previously used other products switch to buy this one instead.

Meanwhile, many factors influence whether people will sell or not—production costs, prices of other assets in the market, incoming news, and their own expectations.

The origin of buying and selling pressure in financial markets

In stocks, things are more complex than buying ordinary goods because buying and selling pressure does not come from the desire for the product itself but from expectations.

Demand in stocks is driven by:

• Economic growth, leading investors to believe companies will earn more profits.
• Low interest rates, making stock returns more attractive than saving money.
• Financial system liquidity—when more money flows into the stock market, demand increases.
• Investor confidence—good news boosts demand; bad news causes selling.

Supply in stocks is driven by:

• Company policies—raising capital increases supply; share buybacks reduce supply.
• IPOs of new companies—adding supply to the market.
• Regulations—conditions set by major shareholders for selling.
• Seller expectations—if they expect prices to fall further, they will sell more aggressively.

Meanwhile, when “equilibrium” occurs, prices stabilize

The more demand and supply are unbalanced, the more volatile prices become. But they cannot move forever.

When prices rise too much, sellers start to see opportunities to sell. Buyers become hesitant, leading to increased supply and decreased demand until the price returns to the equilibrium point, where buyers and sellers see it as fair.

When prices fall too low, buyers start to see value, and sellers are reluctant to sell. Demand increases, supply decreases until the price moves back to a suitable level.

How traders view the market

While economists look at the company’s fundamentals, traders focus on the real buying and selling pressure using various techniques.

Bullish green candlestick (close price high) = Buying pressure overcomes selling pressure; demand is strong.

Bearish red candlestick (close price low) = Selling pressure overcomes buying; supply is strong.

Doji (open and close at the same price) = Both sides are balanced; indecision.

If prices keep making new highs with increasing volume = demand is strong; prices may continue upward.

If prices keep making new lows with increasing volume = supply is strong; beware of a downtrend.

The moment to trade—when supply and demand break balance

Common example: Demand Supply Zone Breakout.

Prices continue moving in one direction, e.g., uptrend (Rally), pushing prices higher. When the real sellers step in, prices break and pause in a base (Base) before setting up for a new move.

When good news or strong economic data come in, buying pressure returns strongly, breaking the range and continuing upward (Rally Base Rally)—this is when traders position themselves with stop-losses in place.

Conversely, if a downtrend (Drop) occurs, prices plunge due to overwhelming supply, followed by a pause (Base) and further decline (Drop Base Drop)—a sign of persistent heavy selling.

Why understanding this is important

All financial instruments—stocks, crypto, or forex—depend on supply and demand. When imbalance occurs, prices move.

Forecasting current supply and demand = knowing where prices are headed.

Knowing how unbalanced supply and demand are = understanding how strong the imbalance is.

Knowing when equilibrium will return = predicting when the market will pause or reverse.

Therefore, next time someone says “the market is strong” or “the market is weak,” just treat it as a nickname. Instead of that, focus on what the actual supply and demand look like. This understanding will make your investments a thousand times more accurate.