To understand price trends in different financial markets, it is necessary to quantify the quantity of demand (i.e., the strength of buyers, also referred to as bullish pressure) and compare it with the quantity of supply (i.e., the strength of sellers, also referred to as bearish pressure).
The price formed at a certain instant in the market (which can be defined as the equilibrium price) is the meeting point of supply and demand i.e., it is the price that equals the quantity offered and the quantity demanded.
The equilibrium price can be represented graphically on a Cartesian diagram and coincides with the meeting point of the demand curve (D) and the supply cure (O).
When the two forces in the field are equivalent, prices oscillate sideways in trading-range without providing any particular operational cues. However, this situation of substantial balance between buyers and sellers is not likely to last long: the arrival of economic-financial news, rather than a change in future expectations by traders as well as some technical factors constantly change the consistency of the two forces in the field.
Assume that there is an increase in demand in the market and that this causes prices to rise. This rise will stop only when the price increase reduces buyer demand (i.e., fewer and fewer buyers will be willing to buy at higher prices) and/or increases the consistency of sellers (more and more sellers, given the price rise, will have an incentive to increase supply).
When prices tear upward, for example, volumes at first increase significantly because of a marked increase in bullish pressure. Then there is a second phase in which prices continue to rise by taking advantage of the short-term positive momentum.
At some point, the ascent comes to an end either because the strength of the buyers is diminished (i.e., bullish pressure is reduced) and or because the strength of the sellers is consistently increased (i.e., bearish pressure intensifies, typical behavior signaling the presence of a distributional phase).
Conversely, if there is an increase in supply in the market this causes prices to fall. This decline will stop only when the price reduction reduces the bearish pressure (i.e., fewer and fewer sellers will be willing to sell at lower prices) and increases the size of the buyers (more and more buyers will be incentivized to enter the market, thereby increasing the bullish pressure).
When prices accelerate downward, for example, volumes at first increase significantly because of a definite increase in bearish pressure. Then there is a second phase in which prices continue to fall by taking advantage of the short-term negative momentum. At some point the descent is exhausted either because the strength of the sellers is diminished (i.e., bearish pressure is reduced) and or because the strength of the buyers is consistently increased (i.e., bullish pressure is intensified, a behavior that signals the presence of an accumulative phase). (reproduction restricted)