Supply and Demand

Supply and Demand

A stock's price will adjust to higher or lower prices based strictly on supply and demand principles.

In
Figure 7 is shown a diagram of a green candlestick. The green color of
the candlestick indicates that the closing price of the stock at the
end of the day is higher than the opening price at the beginning of the
day.



As
you will see, the candlestick's color and size provide very important
clues regarding the TRADER'S SENTIMENT toward a given stock's future
price.

Notice that 'trader's sentiment' is the key phrase here.
In short term trading, it is critical for the trader to have a clear
understanding of what other traders are thinking. As you will see, the
most direct way to get that understanding is through proper
interpretation of the candlestick.

Let's look at an example. In Figure 8 is shown a candlestick of XYZ Company, which opened at 25 and closed at 25 3/8.




The
candlestick is green in color, which gives us a quick visual signal
that the stock price has rallied higher during this period.

How
can we use this information to help us understand what other traders
are thinking? To answer this question, we will follow the candlestick's
changes step by step to understand the mechanism which is driving the
stock price to move higher.

In Figure 8, we see the stock opens
at 25, and then quickly rallies to 25 1/8. The reason the price moves
to 25 1/8 is because there is a high demand to buy the stock at 25 1/8,
and a short supply of sellers offering stock at 25 1/8.

Once all
of the stock available at 25 1/8 is snatched up, the next group of
sellers steps up to offer their stock at 25 1/4. All of the 25 1/4
stock is quickly snatched up because there are still a larger number of
traders willing to buy at 25 1/4 than sellers willing to sell stock at
25 1/4.

Once the 25 1/4 stock is gone, the next group of sellers
steps up to offer their stock at 25 3/8. The 25 3/8 stock is quickly
snatched up too.

This process will repeat itself until the buyers loose interest in buying the stock resulting in a reduction of demand.

The result of combining these steps is a green candlestick with an opening price of 25, rallying to a closing price of 25 3/8.

During
the rally period; however, the astute candlestick reader will be able
to observe the long green color of the candlestick, and deduce that
buyer demand is high.

Now there is only one reason why traders
would increase demand by stepping up to buy the stock, and that is
because they think that the stock will go up in the near future. So by
observing the candlestick color and size, the astute candlestick reader
is able to deduce exactly what other traders are thinking, and that is
that they think the stock price will go higher in the future.

In Figures 9 & 10 we show an example of how the same principle in reverse applies to the analyses of a red candlestick.



The
red color of the candlestick indicates that the closing price of the
stock at the end of the day is lower than the opening price at the
beginning of the day.

In Figure 10, we see the stock opens at 25 3/8, and then quickly drops to 25 1/4.




The
reason the price moves to 25 1/4 is because there are many sellers
looking to unload there stock at 25 1/4, and a low number of buyers
willing to buy at 25 1/4.

Once all of the buyers have bought the
stock at 25 1/4, the next group of buyers steps up to bid for stock at
the lower price of 25 1/8.

The desperate sellers quickly sell all of the stock at 25 1/8, and then the next set of buyers step up at the price of 25.

This
process will repeat itself until all of the sellers have unloaded all
of the stock that they want to sell, resulting in a reduction of supply.

The
result is a red candlestick with an opening price of 25 3/8, falling to
a closing price of 25. During the stock's price fall; however, the
astute candlestick reader will be able to observe the long red color of
the candlestick, and deduce that demand for the stock is low.

Now
there is only one reason why traders would increase the supply of stock
to sell, and that is because they think that the stock will go down in
the near future.

So by observing the candlestick color and size,
the astute candlestick reader is able to deduce exactly what other
traders are thinking, and that is that they think the stock price will
go lower in the future.

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