Demand and supply theory is the core concept of economics. In the simplest language, it means that when the demand for a product increases with the supply shortage, its price increases. In the contrary case, the supply of the product increases without an increase in the demand, and its price falls. The wonders of demand and supply can be seen in every candlestick chart of shares you open.

The candlestick chart helps in tracking the movement of the price of a stock. This action and reactions to the prices keep the market going. It can be said that with the knowledge of demand supply and price action, a trader learns to track the momentum of the market.

This theory is applicable in almost all markets. When it comes to the stock market, the demand and supply theory plays an important role in forecasting the stock price.

The core aim of the stock market is to let people buy and sell the stocks they find promising in terms of investing and trading. The buying and selling go hand in hand. If there is a buyer of a stock, there must be a seller, then only the order executes. The same goes for the situation of selling the stock.

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It is similar to buying a product from a shop. In this scenario, you are the buyer and the shopkeeper is the seller. But when the shopkeeper has too many buyers for a single product, he will eventually need to increase the price of the product. Now, the one who can afford to buy the product at a high price will buy it. The rest of the buyers will wait until the price goes down to normal.

The price of stocks also works in a similar way. You must have seen stocks of some famous companies trade at higher prices. The reason behind this is their demand is higher than the small-cap and mid-cap stocks listed on the stock exchanges. People have trust in famous companies like Reliance Industries, TCS, DMart, etc. that’s why people keep buying the stocks of these companies even at higher prices.

How Demand and Supply is Unique and Reliable

There are various theories, techniques, tools, and strategies flowing in the market regarding technical analysis in trading. Some rely on patterns, some on indicators, and some on breakout strategies. All these theories or techniques have an end point somewhere. They work on a detailed definition with very little or negligible scope for improvement. This clearly shows that they are not dynamic enough to match the current pace of the market.

When it comes to understanding the Demand and Supply theory, there is no barrier to learning. In the demand and supply theory, learning extends with your will to learn. Here’s how you can learn trading with the help of demand and supply theory:

1. Understand the breakdown of every candle: Apart from any pattern, it is important to understand the formation and breakdown of every candle. When you understand the reason behind the formation of every candle, you become competent enough to forecast future moves.

2. Buy at the right time: The majority of people buy a stock after hearing some tips about it or any news of its boom. But with adequate knowledge of demand and supply theory, you’ll be able to identify the points from where the up move or down move is going to start. It will help you make profits ahead of others.

3. Helps you know when to sell: One of the major problems with people is that they buy stocks they find promising. But they don’t know when to sell it and book its profits. Demand and supply theory will help you understand where the rally is probable to reach. With this knowledge, you can easily understand when to sell the stock and book your profits.

The demand and supply theory keeps evolving with the market. It helps in forecasting the future price of the stock with the help of concepts of price action. It works on a dynamic concept. It helps in understanding the candlestick chart patterns with an exclusive view and understanding.

By Sooraj Singh Gurjar, Founder and Managing Director, Get Together Finance (GTF). Views are personal.