Supply And Demand, The Forces That Move Stock Prices

The reason why stocks go up and down is because of supply and demand. If you can analyze where supply and demand is coming in then you can predict the beginning of big trends accurately. You can also roughly predict when a stock is going to change direction.

Supply and demand is closely related to volume. When there is heavy volume coming in to purchase stocks, there is a lot of demand for the stock. That in turn pushes prices higher. On the other hand, when there is heavy volume coming in to sell stocks, there is a lot of supply in the market. Too much supply will cause prices to fall drastically.

The Cycle Of Supply And Demand In Stocks

The cycle of supply and demand can be seen on stock charts. This concept has very close correlation to the concept of stock market stages.

  • Prices increases when demand increases
  • Prices decline when demand declines and supply increases
supply and demand in stocksHere is a great picture of supply and demand in the stock market

Your job as a stock trader or investor is to try and determine whether demand is increasing or decreasing. You also have to be aware whether supply is increasing or decreasing as well.

Its pretty easy to know when supply and demand is increasing or not. One of the ways is to look at what trend the stock is currently in. The 3 different trends of the stock market

  • Stock in uptrend = demand increasing, supply decreasing
  • Stock in sideways trend = supply and demand are equal 
  • Stock in downtrend = supply increasing, demand decreasing

Volume Give Hints Of Supply Or Demand Increasing

Stock volume often give us hints of when supply and demand is increasing. When a stock is starting to move higher and you see volume increasing, then you can be very certain that demand is increasing. On the other hand, when you see a stock starting to crater and move lower and you see volume increasing, then you can be very sure that supply is increasing.

In the chart above, you can see how CFG started to climb slowly in November. Then all of a sudden a huge burst of volume came in as the stock started to rise. This shows us there is heavy accumulation of the stock. Look how far the stock rose.

The chart of AAOI above is another very excellent example of how volume gave hints of increasing demand. As the stock grinded higher, big bursts of volume came occasionally. Smart investors and institution can do all kind of tricks to avoid detection but one thing they can't avoid is the volume they produce when they buy shares. The stock more than tripled in a short span of time. You have to thank volume for pointing the obvious.

The chart of CEMP above shows how volume hints of increasing supply. As the stock continued to drop, huge waves of volume came in. Supply came in and this in turn pushed the stock further down.

When a stock is declining, you do not want to see increasing volume. This often point out the fact that investors are slowly selling the shares of the company. Selling shares means putting supply in the market which drives down the price. In the chart above, you can see how CXRX exhibited many volume spikes as it declined. The stock dropped from $30 to $2!

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