Identify supply signals: The key that investors need to know to catch the right stock timing

Why do stocks sometimes surge out of nowhere and sometimes plummet to the point of bruising? It’s not the company or the news—it’s the underlying mathematical forces called Supply and Demand—two massive factors hidden behind every price movement. Understanding them means understanding half the market.

Before trading, know what Supply and Demand are

Demand (Demand) = The desire to buy; the number of shares investors want to purchase at various prices. Generally, as the price drops, demand increases (because) the price is lower; demand decreases (because) the price is higher.

Supply (Supply) = The desire to sell; the number of shares owners want to sell at various prices. Generally, as the price rises, supply increases (because) profits; supply decreases (because) losses.

Equilibrium (Equilibrium) = The point where both forces meet. Here, the price remains stable until new information causes a shift.

Why is supply important to investors? 3 main reasons

1. Supply indicates the strength of the selling force

When stocks drop sharply (Drop), it’s not necessarily bad news about the company but because many investors want to sell simultaneously. High supply = strong selling force, which signals how the price might move next.

2. Supply shows us potential reversal points

When prices fall and break through a support line, the selling force diminishes (because) those wanting to sell have sold out ###at### the supply zone. Before that, the price might rebound = a buying opportunity.

( 3. Supply indicates risk of price manipulation Rich houses often pump & dump stocks with low supply = few sellers. When supply is exhausted, prices skyrocket into the stratosphere. Once buying power wanes, the price collapses with gaps and holes.

Factors causing changes in supply in the financial markets

) Company side

• New capital raising (IPO / Rights Offering): Increases shares in the market = more supply = downward pressure
• Share buyback ###Buyback###: Reduces shares in circulation = less supply = more bullish

Market side

• New listings: New companies entering the supply zone
• Regulatory Silent Period: Restricts major shareholders from selling after IPO, temporarily reducing supply

( Institutional side

• Monetary policy: High interest rates cause money to flee stocks for better yields = increased supply, selling pressure = decreased
• Breaking news: Good news encourages holding and buying, sellers stay quiet = reduced supply signals rising prices

How to apply supply concepts in trading based on principles

) Level 1: Analyze candlestick charts and selling pressure in Demand-Supply Zones

If you see a red candle (close < open): Strong selling = thick supply. Don’t rush to buy here.

If you see a green candle ###close > open(: Strong buying = weak supply. Price may continue upward.

) Level 2: Follow reversal points (Reversal)

Supply Zone Rally Base Drop (RBD): Price has rallied up and then stalls (Rally), hitting a base with lots of sellers (Base), then suddenly drops ###Drop( due to a mass sell-off.

Entry point: When the price breaks below the base, set a stop loss outside the zone.

) Level 3: Follow trend continuation (Continuation)

Demand Zone Drop Base Rally (DBR): Price plunges due to many sellers (Drop), then reverses as sellers exhaust (Base), buyers step in, and the price rises again (Rally).

Entry point: When the base breaks above, trade in the direction of the trend.

Case study: Which stocks fall due to supply?

Imagine XYZ stock with low liquidity (Liquidity). When good news hits, buyers rush in blindly. The strong buying is met with thick supply because many existing shareholders want to sell for cash. The price doesn’t rise as expected; sometimes it even drops if continuous supply enters. This is called a “fake price” — a price not aligned with news, caused by fake supply.

Meanwhile, ABC stock with a founder holding a high percentage (low supply). When good news arrives, buyers flood in, but the founder still holds a large stake and doesn’t sell. The price can then melt up rapidly.

3 common mistakes investors make regarding supply

1. Only look at price, ignore supply: Price can deceive, but supply tells the truth.
2. Beware of whales (whales): Large shareholders wanting to sell all at once can cause rapid price drops.
3. Silent Period rules: After IPO, major investors must wait, which temporarily reduces supply.

Summary: Why understanding supply is essential

Simply put, supply is like a drain in the stock market. When supply is full (Supply Zone), prices get stuck and can’t go higher. When supply dries up (Supply), prices can rise easily like a glass of wine with little resistance.

Those who can clearly identify Demand-Supply Zones will better time their entries and exits Entry-Exit than those just following news or traders’ fears.

But supply isn’t everything—it’s just part of the market cycle, combined with momentum, news sentiment, and the discipline of the trader. Only then can you truly profit.