How A Stock Moves Up and Down – A Simple Explanation

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Yesterday I had written that the current rising stock market is news based uptrend.

The question is how good news has to be that it keeps going up? Well, the answer is that there can be no news good enough that the markets will keep going up always.

WHY?

Well lets us go back to how stock markets work.

Very Simple Logic:

If Demand is more than Supply (there are more buyers than sellers), then the stock moves up.

Similarly, if Supply is more than Demand (there are more sellers than buyers), then the stock moves down.

When good news hits the market, traders and investors jump in with cash to buy stocks. This increases demand. Similarly, when a company shows great results you will see the stock in action – it goes up for some time or even days depending on the results.

And exact opposite happens. When bad news hits the market – investors panic and start selling the shares – thus bringing the stock market down.

The question remains – why then going up has a resistance somewhere and coming down also has resistance somewhere a.k.a support?

No, unlike what many traders beleive, candlesticks do not decide resistance and support levels. It is the news and limitation of investing that brings resistance.

Talking about a recent example – both down and up you can see this year 2020:

As you can see from 12000 levels – coronavirus news to less than 8000 in three months – and then lockdown ends – (good news) – so slight rise and then Biden wins – shooting up.

Can you now see a correlation between news and movements of the stock markets?

Just a small note on why more demand takes the stock up. Hope you must have seen Ask and Bid prices when you trade anything on your trading terminal. If you do not know – Bid-Ask Spread is typically the difference between ask (offer/sell) price and bid (purchase/buy) price of a stock. Ask price is the value point at which the seller is ready to sell and bid price is the point at which a buyer is ready to buy. If the demand is high the seller usually tries to keep the sell price of a stock slightly higher than LTP (Last Trading Price). Since investors are desperate to buy the stock, they accept the offer – thus taking the stock price higher.

Similarly when bad news hits the market/stock the investor panics and is willing to sell at whatever price they get. This time the Bid is lower than the Ask – frustrated seller accepts the offer taking the LTP lower.

When trading was done offline you must have seen such images in your news channels – I am talking about late ’80s and 90s:

This is where a broker is signalling a stock sell/buy price to another broker. If they agreed the stock price moved.

But now since its all online the broker’s job is limited to make sure the trading goes through online.

Hope I have made it clear how the stock markets. So if you want to be small-time investors (short term investor) then your best friend is the news, not any charts of a technical indicator – actually, they will become your enemy in the long run.

This is news based uptrend.

News 1: Joseph Robinette Biden Jr won the US election 2020. He is known to be pro-business and less anti-china. This is positive news for stock markets across the world.

News 2: Pfizer, BioNTech say their COVID-19 vaccine is more than 90% effective:
https://indianexpress.com/article/coronavirus/pfizer-says-early-data-signals-covid-19-vaccine-is-effective-7028254/

So two news both positive for the markets.

What amuses me is that so-called experts of stock markets will not admit this – rather they will make a confusing technical chart and fool people that look I had predicted a huge run for the markets because of so and so candlestick etc.

Seling candlesticks make money not looking at them and predicting market movements.

I suggest if you cannot stop yourself from trading then go for Call Debit Spread.

Most importantly, become a conservative trader, try to make 3 to 5% a month on the money used to trade. Anything beyond that is impossible to make. Too much fake profit screenshots are there in social media nowadays. I suggest just get out of these channels. They take one buy future position in one account and one sell future in another and show the screenshot of the winner. It’s that easy 😉

If you look closely they will not show call or put buy position at all as buying a call and a put seldom makes money.

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