How to evaluate the balance between supply and demand
To evaluate the balance between supply and demand, technicians analyze the history of price changes, trading volumes and other statistical data characterizing the situation on the market. This conceptual model is not difficult to understand. As prices rise, demand exceeds supply and buyers are more interested in buying stocks than sellers in selling them. The reverse is also true. When prices fall, supply exceeds demand and sellers are more interested in selling stocks than buyers buy them. When certain stocks are traded in a fairly narrow range of prices, it can be argued that in this case a balance between supply and demand is achieved. This situation is reflected in the chart of changes in the price of shares when certain stocks are traded in a certain trading range.
Technical analysis helps to identify such scenarios. Technicians study charts, seeking to find price levels,under which “buying pressure” prevents further reduction in the price of shares or under which pressure from sellers prevents further increase in the price of shares.
Here is a hypothetical scenario that illustrates this point. An authoritative investment advisor recommends buying XYZ shares, the price of which at the close of the previous trading day was $ 18.50 and which were traded in a fairly narrow price range over the past four months. A recommendation to buy these shares, in essence, means the advisability of buying them only if they are sold at a price not higher than $ 19 per share. Thus, the idea in this case is not at all that you buy these shares as soon as the relevant recommendation appears, but that you buy them at a reasonable price.
Let's continue consideration of this hypothetical scenario. Suppose the recommendations of our investment adviser are trusted by a large number of traders. In this case, the above recommendation will find a hot response: there will be many buyers willing to purchase XYZ shares, as a result of which their price will soon rise to $ 21.
Rush purchases due to such recommendations tend to fall rather quickly and return to the price at which their purchase becomes fully justified after all the “early” buyers have completed their trading operations. More patient clients of this investment adviser have probably already faced similar situations more than once, so they will wait for the rush in demand for stocks and place either a limit order or a stop-loss order somewhere near the price of $ 19. On the stock market, as a rule, there is a sufficient number of patient traders who, of course, will not allow a further reduction in the share price.
Now imagine that you are tracking the behavior of these stocks without knowing anything about the recommendations of our investment advisor. You will see that within one to two weeks the stock price of XYZ will undergo the following changes.
Since technical analysis helps to select a suitable input price for trading and minimize losses, it is considered a powerful tool for trading.
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