What are the factors that determine supply and demand that investors need to know?

Factors influencing supply and demand are not as simple as they seem because, in reality, many underlying factors drive changes in the prices of financial assets, whether stocks, currencies, or commodities. Investors who deeply understand these factors will have an advantage in predicting price directions and timing their trades more accurately.

Supply (Demand) and demand (Supply) are the main forces driving the market. However, what few notice is that behind these forces are many other hidden factors. These factors become key to gaining a deeper understanding of the market.

What are the factors that determine demand?

Investors’ and consumers’ purchasing desires do not arise from arbitrary decisions but are influenced by many factors. The main factors include:

Macroeconomic factors such as central bank interest rates, inflation rates, and economic growth speed directly affect people’s ability and willingness to invest. When interest rates are low, investors tend to seek returns from stock and capital markets more, increasing demand.

Liquidity in the financial system also plays a crucial role. When large amounts of money are released into the market, investors have more funds to invest in higher-risk assets, leading to increased demand in stock markets and other assets.

Investor confidence is a psychological factor often overlooked. When investors anticipate economic growth, better corporate earnings, or political stability, they are more willing to invest. Conversely, worries or fears can quickly reduce demand.

Additionally, there are other factors such as personal preferences and tastes, the number of consumers, seasonal effects on certain products, and even future price expectations.

What are the factors that determine supply?

For sellers or producers, the factors influencing supply are equally complex. The main factors include:

Production costs are the first consideration for producers. When costs decrease, producers are more willing to expand production and offer more. When costs rise, supply tends to decrease.

Corporate policies significantly influence the volume of shares in the market. For example, issuing new shares (capital increase) increases supply, while share buybacks reduce the number of shares outstanding.

New company listings via IPOs add new securities to the market, potentially impacting prices in the short term.

Technology and production efficiency also play a role. When new technologies are developed, costs decrease, and supply increases.

External factors such as natural disasters, tax policies, exchange rates, and access to funding affect production capacity and willingness to sell.

How do these factors work together?

These factors do not operate in isolation but interact and influence each other. For example, a healthy economy (demand factor) may attract new companies to list on the stock exchange (supply factor). Conversely, rising production costs due to fluctuating exchange rates can reduce supply, pushing prices higher, which may then decrease demand.

Understanding these interconnected relationships is crucial for market analysis.

How do demand and supply factors influence price movements?

Applying demand and supply factors to asset price analysis can be approached in two ways:

Fundamental analysis

From this perspective, stock prices change because expectations about a company’s profitability shift. When analysts release positive earnings forecasts, demand increases as buyers (demand side) step in, and sellers hold back, pushing prices higher. Conversely, negative information reduces demand and increases supply, leading to price declines.

Technical analysis

Traders use various tools to measure the balance between buying and selling pressures:

Candlestick analysis indicates which side is winning during a specific period. Green candles (close higher than open) show buying strength, while red candles (close lower than open) indicate selling dominance.

Trend analysis helps identify which side has more momentum. Continuous new highs suggest strong demand, while new lows indicate strong supply.

Support and resistance levels mark price points where investors expect demand or supply to be significant. Support levels are where demand is expected to be strong enough to prevent further decline; resistance levels are where supply may cap upward movement.

Trading Demand and Supply Zones

The Demand Supply Zone technique applies these factors by identifying moments when price loses balance and is likely to revert to a new equilibrium.

Reversal trading

Demand Zone - Drop Base Rally (DBR) occurs when excess supply (over-supply) pushes prices down. Afterward, buying interest builds, causing the price to stabilize in a range. When new factors emerge, the price breaks upward, and traders can buy with stop-losses below the range.

Supply Zone - Rally Base Drop (RBD) is the opposite: excess demand (over-demand) drives prices up, but after reaching a certain point, selling pressure causes the price to fall below the range. Traders can short with stop-losses above the range.

Continuation trading

Demand Zone - Rally Base Rally (RBR) in an uptrend shows rapid price increases, followed by pauses. When buying resumes, the price continues upward.

Supply Zone - Drop Base Drop (DBD) in a downtrend shows sharp declines, pauses, then further declines as selling pressure returns.

Summary

The factors influencing supply and demand are complex and highly interconnected. Investors with a thorough understanding of these factors can apply this knowledge to both fundamental and technical analysis. Mastery of this subject requires continuous study and real-market experimentation to better grasp the overall picture of what drives supply and demand each time.