[In-depth Study of Market Maker Concept]-Steemit Crypto Academy | S4W6 | Homework Post for @reddileep

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1- Define the concept of Market Making in your own words.

Markets cannot function, products cannot sustain, companies cannot survive without Customers, That is the reason money in millions is spent on extensive advertising, offers are given and customer-friendly plans are chalked out. Everything that doesn't attract buyers is a FLOP: All this is relevant in the crypto world as well.

In case you are wondering how:
Just imagine Bitcoin and other leading currencies having no buyers, the price would have been very low -- unnoticeable. The more there is demand for any product in the market the more expensive it gets and the more sellers want to sell it. The race for selling - buying is liquidity. Both seller and buyer expect to make a profit.

Market making is a camouflaged process wherein the market is given momentum in terms of Bid-Ask by supplying artificial or fake tariffs of sellers and buyers to the particular currency.

How does it matter:

Ever seen a crowded hawker/shop? What do you do when you see people thronging the particular hawker/shop?

I will tell you: you also go there even if you do not intend to buy anything.
Similar is the concept of Market Maker the market maker create an atmosphere for trade. They offer a little higher rate through which market recieves the traction which is followed by small traders start buying the asset at that rate. Once the price rises they sell the assets which agin results in the price fall of the asser. Out of this process they succeed in making money by making naive traders to buy and sell prematurely.

Sometimes it is more than mere profit making. The sham coins having no value in reality are showed in a positive light through 'market making' process luring traders to invest in the coin. Once the traders throw their money, the market makers withdraw the money leaving people high and dry. Such instances cannot be ruled out, mostly on unregulated exchanges.

2- Explain the psychology behind Market Maker. (Screenshot Required)

'Market Maker' concept is based on hoodwinking psychology wherein the big players who aim to make profit -- push the market towards the direction they want. To make it more understandable: the big guns create the order offering higher or lower rates than the existing prices at a particular moment. For example, if the bid price of Coin Z is 60 Rs. The players set the bulky order at 60.05, similarly, if they want prices to drop, they try to manipulate the prices by giving lesser than the existing price say, 59 . 90
Please keep in mind that every tom, dick and harry can not push the price up or down.
For this strategy to work one must own huge money and be capable of putting in big orders. Once the huge order is set, the small traders get swayed and they start trading within that price bracket. However, every trader does not dance to the tunes of Market Makers, the mature traders understand the psychology and play along with market makers. That is smart, no?

^{Picture A1}

How does it help?

Whales mint profit from small traders, they create a selling or buying trend within the price bracket of their choice and then sell or buy accordingly. Even if the price change happens by a small margin of 0.5, they can make handsome profit, given the fact that they have put in huge money.

Secondly the coins that are sham or have no value, in reality, are presented as coins of some worth. Huge sell and the buy order supplies liquidity to the sham coin and therefore attracts investments in traders. Traders should always avoid trading on unregulated platforms.
In picture A1 the Bid price, of steem, at the time of taking screen shot was 0.87786 and the ask prise was 0.87911. Market makers can bridge the gap between 2 by offering slightly higher price. By doing that, liquidity will be generated.

Once the market is on wheels, markets makers can peck on premature moves of naive traders.

3- Explain the benefits of Market Maker Concept?

Advantages of Market Maker:

The answer to this question lies in the foregoing discussion.
The market makers resort to this scheme to make a profit, therefore, we can say if a trader can somehow understand what they (market makers) are up to and trade accordingly then profit is a sure thing.
*It pumps liquidity to the market which offer wheels to traders.
*Trades are executed quickly as whales are in a position.

• Value of an asset is pumped up by the market maker therefore if the coin goes up, it will be widely recognised.
• New traders rush towards buying the coin after they see the value increasing.

4- Explain the disadvantages of Market Maker Concept?

As already told the market liquidity when the market maker concept is on, is mostly fake and artificial wherein the benefits tilt towards the big players who are manipulating the market. When the small traders make entries or take positions based on fake 'Market Maker' liquidity the entries are destined to be wrong.

• Traders end up selling or buying a particular asset prematurely.
• Any enticing price figure, can put you at disadvantage. Because in absence of the fake liquidity the asset can turn out to be a flop.

5- Explain any two indicators that are used in the Market Maker Concept and explore them through charts. (Screenshot Required)

A lot of indicators are in the market to track the Market makers. I am pressing Moving Average (M.A) and Bollinger Bands (BB) in use to demonstrate how up trends and downtrends are becoming conspicuous with the help of indicators.
Sooo, let's walk through the indicators:

In picture A I am using BB indicator. If you focus on the performance of ETH/USD upto December 2020 X1 it has remained between 500-700 mark. But then in Jan 2021 it has witnessed uptrend and reached even 1300 mark X2 . This is how the market reacts when the whales or Market Makers invest a huge chunk in a particular coin. Once the coin gains momentum the small traders follow the trend.

^{Picture A}

Similarly, in Picture B market plunges abruptly, X and Y such shift may not be necessarily caused by Market Makers but this is how market reacts when the whales decide to sell. Once traders succumb to the strategy, Market makers buy assets at cheap prices.

^{Picture B}

In Picture C I have used MAs to track the market movement. This picture tracks the market in different moods, A - B shows fall, B - C shows rise , C - D again bearish and EF is bullish.

^{Picture C}

Picture A, B, C source

CONCLUSION

'Market Maker' concept is forte of big guns who can pump liquidity into otherwise sleeping market, by pressing their fat investments in service. Small traders can either play along with market makers: for that they need to understand their psychology -- or dance to the tunes of market makers.
This trick is resorted to to mint profits from small traders by forcing them to sell or buy prematurely.

Shout out to prof. @reddileep for exposing us to yet another aspect of the vast crypto world.

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With Regards,
@aasifwani

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