Why the price of a stock go up or down?

Pic credit: Kanchanara

If you want to make money using technical analysis. You have to first understand : How the stocks move? Without understanding this, you will just keep on looking for magical tools or indicators to help you make money which does not exit in real world. After wasting time, energy and money you will be highly disappointed and leave the stock market for good.

To put you on the right track without any fluff, let me tell you, everything in this world moves on: Demand and supply If you need something badly and there is dearth of that thing then you will pay whatever it takes to have it. Long queues in front of Apple stores at the launch of their new device every year is an example of that. The reasons to have the urgency to buy that thing could be anything, let's just say in the stock market context, it's the value. Firstly, be very clear that you and I are incapable to move the price of any instrument be it stocks, commodities, cryptos, futures or options.

We are just riding at the back of big institutions who have seen some value in buying or selling any instrument. Yes, you can make profit either by buying i.e. going long or by selling i.e. going short. Bollinger Band, Elliot Waves, Fibonacci Retracement, Moving Averages, Gann Fan, Gann Box, Pivots, Anchored VWAP are statistical tools or indicators which take price, volume, supply or demand zones into account and make calculations easy for you. But the foundation of price going up or down still relies on the demand and supply. You can navigate the stock market without any indicator or tool also. In a nutshell, there is no magical tool or indicator which can give you easy money from the stock market. You might get disappointed but this is the truth. Let us understand demand and supply with an example.

Fig:1 Nava on daily timeframe

In the above chart notice three touch points shaded with red circles, they are the zones where buyers got trapped. They bought the stock in euphoria and when the selling started, they chose not to sell the stock. There are 3 touch points which have trapped buyers. As the price kept on consolidating for months, it created a range of 8 months. In those eight months it tested the touch points twice, see the yellow strip but failed to go above it. Signifying that there were sellers active during this time which did not let the price go above it. Which means the supply was stronger than the demand and hence, price could not breach it. After 8 months this range or base or consolidation gets breached on very high volume and price moves up. Focus on pivotal days, how price contracted before giving a breakout marked with pink shaded rectangular boxes. Now these are the pivotal days which are best suited for an entry for a trader or investor, due to the fact that price is hovering at a crucial resistance level, literally sticking to it again and again and this is happening after 8 months of consolidation. Most important such areas give place for logical stop loss on the charts.

So, first there has been a pivot in the business of the company, and now institutions are seeing the value in the price hence, they are accumulating it. Because of this, demand is higher and supply is lower creating an imbalance resulting in price moving up. It is due to demand and supply that the price structure is forming 3T VCP or Cup and Handle pattern. Even if you don't understand the chart patterns, it is okay. But you must understand the concept of demand and supply, equilibrium and imbalance in it.

Now the institutions are strongly accumulating the stock as we can see by the extraordinary volume spikes as well. Now as the price moves higher, the traders or investors who got trapped in the stock 8 or 10 months prior will be praying for the price to come to their breakeven point, so that they can sell it in no profit and no loss. As they will see the price nearing to their buy price, they will start selling too, institutions which were already hungry to buy more of it, will start getting the fill in their orders, the supply will be further sucked by the big demand and we will see 10% or 20% kind of moves in one trading session. That's how all the breakouts work.

This brings us to the closure of this blog. I hope you enjoyed reading it as much as I enjoyed writing it. If you liked what I wrote and are serious about creating wealth from the stock market you can become the part of Eight Figr League, a credible platform for market participants through which you can know the pulse of Indian, US, China and European stock markets, connect with other great traders or investors, get daily updates, get well researched weekly newsletter prepared by qualified traders and financial analysts, learn fundamental and technical analysis, connect with me over video call. Your one month is on us, then it is just ₹22 a day.

You can also connect with me over LinkedIn and X(Twitter) or watch me speaking on YouTube about trading, investing and mindset. I'm a student for life, so don't hesitate to send over your views or sources to help me enlighten myself. If you are a beginner and want to learn how I do what I do. The below series of blogs will help, to be read in chronological order:

• What to expect from trading?

• Does technical analysis work?

• How to read the stock market?

• Why risk management in the stock market is your lifeline?

• A Gambler's edge in the stock market

• 9 rules to not suck in the stock market

• Simple strategy for working professionals to make millions from the stock market

  
  

Thank you for your time. Have a great week ahead in creating sustainable wealth!