What are the key variables in determining supply and demand, and why are they the key to effective investing?

Supply and demand are considered fundamental mechanisms that drive price movements in all markets, from stocks to general assets. However, to gain a deeper understanding, investors should know what key variables influence supply and demand, and how these variables play a role in shaping market prices.

Supply, Demand, and Key Driving Variables

In basic economic models, demand is the desire to buy, and supply is the desire to sell. However, neither appears naturally; both are determined by a set of variables that create motivation or incentives for each side to buy or sell.

When prices change, it’s not just money that shifts, but also the opinions of buyers and sellers about value, which depend on main variables.

Key Variables Influencing Demand - What Drives Buyers’ Decisions

1. Price and Its Impact on Buyer Behavior

Where is the lowest price? How much higher is the maximum price compared to today? When prices fall, demand increases. This is the law of demand. However, price isn’t the only factor.

2. Income Effect

When stock or asset prices drop, buyers’ purchasing power increases. It seems simple but is crucial. An investor with 100,000 THB can buy different amounts of stocks depending on the current price.

3. Substitution Effect

When one stock’s price drops relative to competitors, buyers tend to switch to the cheaper stock. This shows that money in the market flows not just in volume but also from one asset to another.

4. Additional Variables Affecting Demand

• Investors’ income: If the economy is good and income rises, people have more money to invest.
• Market confidence: Positive future expectations increase demand.
• Interest rates: When rates are low, investing in stocks looks more attractive because bank returns are lower.
• Seasonality: Demand for certain stocks varies by season, e.g., resort stocks in holiday seasons.
• Future price expectations: If investors believe prices will rise further, they buy now.

Key Variables Influencing Supply - What Drives Sellers’ Decisions

1. Price - The Main Driver for Sellers

Supply laws differ from demand. When prices rise, sellers tend to want to sell more because they aim for higher profits.

2. Production Costs

For listed companies, higher production costs may discourage increasing supply or selling quickly. When costs decrease, supply tends to increase.

3. Market Competition

The number of companies or sellers affects supply volume. For example, new IPOs increase the number of shares available.

4. Additional Variables Affecting Supply

• Technology: New tech improves productivity and reduces costs.
• Company policies: Capital increases or buybacks change the number of shares in circulation.
• Weather and natural disasters: Impact production capacity.
• Tax policies: Higher taxes increase costs and reduce supply.
• Exchange rates: Affect import costs for raw materials.
• Access to funding: Ability to raise capital for expansion.

When Variables Interact - Market Equilibrium

When demand and supply variables conflict about which should dominate, equilibrium occurs—where demand and supply curves intersect.

At this point:

• Prices tend to stabilize.
• Quantity demanded equals quantity supplied.
• No surplus or shortage exists.

However, this equilibrium is not static. When key variables change, the equilibrium shifts.

For example:

• Good news about a company increases demand, raising prices.
• Higher interest rates reduce demand in the stock market, lowering prices.
• New IPOs increase supply, potentially pushing prices down.

Applying Key Variables in Stock Analysis

Investors who understand these variables can use them to predict price movements in two ways:

Fundamental Analysis - Company Variables

Investors look for:

• Strong earnings: Indicate profitability, increasing demand for the stock.
• Forecasted revenue growth: If the intrinsic value rises, buyers are willing to pay more.
• Cost issues: Rising costs may lead to selling pressure.
• Financial restructuring: Capital increases or buybacks affect supply.

Technical Analysis - Behavioral Variables

By studying price action and trends, traders observe shifts in demand and supply through:

1. Candlestick Patterns - Daily Supply and Demand Indicators

• Green candles (close > open): Buying pressure dominant.
• Red candles (close < open): Selling pressure dominant.
• Doji (close ≈ open): Balance between buyers and sellers.

2. Trends - Long-term Supply and Demand

• Uptrend: Higher highs suggest strong demand.
• Downtrend: Lower lows indicate supply dominance.
• Sideways: Balance, awaiting new catalysts.

3. Support & Resistance - Actual Price Levels

• Support: Demand zones where buyers step in.
• Resistance: Supply zones where sellers dominate.

Demand and Supply Zones - Using Variables for Trading

A popular method to track supply and demand changes is using Demand Supply Zones.

Reversal Trading

1. Demand Zone Drop Base Rally (DBR) - Hope Returns

• Rapid price drop (excess supply).
• Price consolidates (demand begins to re-enter).
• Price rebounds (demand wins).

Traders buy near the top of the consolidation.

2. Supply Zone Rally Base Drop (RBD) - Resistance Resumes

• Rapid price rise (excess demand).
• Consolidation (supply starts to appear).
• Price drops again (supply wins).

Traders sell near the bottom of the consolidation.

Trend Continuation Trading

1. Demand Zone Rally Base Rally (RBR) - Momentum Continues

• Price rises (demand dominates).
• Consolidation (battle between supply and demand).
• Price breaks higher (demand remains strong).

Traders follow the uptrend on breakout.

2. Supply Zone Drop Base Drop (DBD) - Downtrend Continues

• Price drops (supply dominates).
• Consolidation (battle).
• Price falls further (supply remains strong).

Traders follow the downtrend on breakdown.

Summary - Variables Are the Key

Understanding key variables like price, income, interest rates, costs, and market confidence is the key to reading the market.

Investors who patiently monitor these variables—through fundamental or technical analysis—can grasp what’s happening and prepare for upcoming movements. Therefore, spend time studying these variables deeply, as they are the foundation of smart investing.