Supply rules and timing your stock trades: Why investors need to understand

The Law of Supply is not just a theory in economics textbooks, but a crucial mechanism that drives price changes in the stock market every day. When you understand how The Law of Supply works, you will see the hidden signals in candlesticks and price movements.

Understanding Demand and Supply Before Trading

In the financial market, stock prices do not fluctuate based on anyone’s emotions, but result from the clash between buyers (demand) and sellers (supply).

Demand refers to the volume of shares that buyers want to acquire at various prices. Usually, when prices decrease, demand increases because stocks look cheaper. This is called the income effect — when prices fall, your salary can buy more.

Supply refers to the volume of shares that sellers are willing to offer at various prices. The Law of Supply tells us that when prices rise, sellers are willing to sell more because they gain higher profits. Conversely, if prices fall, sellers tend to hold back from selling.

Where is the True Equilibrium

The actual market price occurs at the point where the demand and supply curves intersect, called equilibrium. At this point, the quantity buyers want matches the quantity sellers are willing to sell.

The reason prices always return to equilibrium is:

• If the price rises above equilibrium, sellers will offer more, but buyers will withdraw, leading to excess inventory, which forces prices down again.
• If the price drops below equilibrium, demand increases as buyers want more shares, while supply diminishes, pushing prices back up.

What Factors Increase Demand

In the stock market, demand is not solely dependent on stock prices but also influenced by other factors:

• Positive news: When there is news of improved company performance, investors rush to buy in large numbers.
• Macroeconomic indicators: If the economy is growing and interest rates decrease, investors shift funds from bonds to stocks.
• Market confidence: As long as investors remain confident about the future, they will continue to want to buy stocks.

What Factors Change Supply

Public companies can control the amount of shares in the market through their own decisions:

• Issuance of new shares (IPO or Capital Increase): When a company raises capital, the number of shares in the market increases, boosting supply.
• Share buyback (Buyback): Companies repurchasing their own shares reduce the supply in the market, decreasing selling pressure.
• Launching new IPOs: Whenever a new company enters the market, the total securities available for sale increase.

How to Use The Law of Supply in Trading

1. Read candlesticks as if reading buying and selling pressure

Green candlestick (closing price higher than opening) indicates demand (buying strength) wins, buyers are pushing forward.

Red candlestick (closing price lower than opening) indicates supply (selling strength) wins, sellers are pushing the price down.

Doji candlestick (open-close nearly equal) means both demand and supply are battling evenly, stuck in a tight range, and the price is uncertain where to go.

2. Catch the moment when price breaks out of equilibrium

Demand Supply Zone Demand Zone Drop Base Rally (DBR) signals an uptrend:

• Price drops sharply (Drop) — excess supply
• Price halts and consolidates in a range (Base) — demand is returning
• Price breaks out upward (Rally) — buy signal, buyers are strong

Supply Zone Rally Base Drop (RBD) signals a downtrend:

• Price surges (Rally) — excess demand
• Price pauses within a range (Base) — supply is coming in
• Price breaks downward (Drop) — sell signal

3. Use support and resistance to see the true balance point

Support (Support) is the price level where demand is sufficient to halt a decline. Here, investors believe the actual price will be bought.

Resistance (Resistance) is the price level where supply is abundant to stop an rise. Here, investors believe profits will be taken.

When the price breaks through resistance, it indicates stronger demand and a potential upward move.

Why Understanding The Law of Supply is Important for Investors

If you know that prices are determined by the balance between buyers and sellers, you will stop relying solely on feelings or news. Instead, you will see the bigger picture — price movements are driven by changes in demand or supply.

Skilled traders do not wait for news; they read candlesticks, analyze support and resistance levels, and catch the moments when The Law of Supply comes into play before the majority of the crowd realizes. When the crowd enters, they exit with profits.

Learning to see the game of demand and supply is essentially learning to see the true structure of the market, making your investment decisions more precise and rational.