Before we begin with the less obvious factors, let’s mention the two obvious ones: Supply and demand. Anything that is bought or sold – be it gold, a house or the US Dollar – is subjected to the power of supply and demand. When the supply increases, surpassing demand, the price will usually decrease. When the demand rises, surpassing supply, the price will usually increase. In theory, demand and supply will battle until they reach an economic equilibrium. This is the point where the quantity demanded (at a specific price) will equal the quantity supplied (at the same specific price).
Want a visual explanation? Sure you do…
Didn’t like the seesaw? Well, here’s an example. Let’s say OPEC nations produced more oil than expected. The market is full of oil. What will happen to the price? That’s right: It will likely decrease. Now let’s say OPEC nations pumped less oil than expected. What will happen? That’s right, oil prices will likely rise.
Now we wish we could tell you that this is the whole story. It really isn’t. First of all, there are many factors that affect supply and demand – either directly or indirectly. We will now discuss some interesting and less-known factors that are involved in trading and that fundamental analysts keep in mind while making trading decisions.
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