[In-depth Study of Market Maker Concept]-Steemit Crypto Academy | S4W6 | Homework Post for @reddileep
Hello to everyone,
In this post, there is professor @reddileep's assignment in this week's lesson. This week's topic is about Market Maker Concept. The professor explained the necessary information about this subject in a nice and simple language in his lecture. I fulfilled the duties assigned by me by doing the necessary research. Without further ado, I want to get straight to the point. Let's start!
Question 1
Define the concept of Market Making in your own words.
There are two types of traders on the market. These; Market Makers and Market Takers. If we summarize these two groups with the most general definition:
Market Takers: Traders who buy and sell instantaneously without negotiating any asset.
Market Makers: Traders who bargain on any asset and buy and sell at the price they determine.
The simplest definitions of these two terms are as above.
If we go into a little more detail; For an asset to have a certain value in the market, it must be bought at a certain price and sold at a certain price. At this point, market makers come into play.
Market makers do not want to buy or sell an asset on the market at the instant price. That is, they negotiate the buying and selling of the asset and using Limit Orders* they buy and sell at a price they want. These limit orders they use provide liquidity to the market and keep the market active.
In other words; The Market Maker concept is the individuals or institutions that determine how much an asset will cost and how much it will be sold for. In other words, they are the people or institutions that determine the direction of the market. Because in general, market markers are individuals or institutions that have large funds on the market. These individuals or institutions are often referred to as Whales on the market. Due to its structure in the market in general; money flows generally from small traders to large traders. In whales, their main purpose at this point is to take away the assets of small traders (like me or us). However, when we trade in the right way and at the right time, we can get a good share of the pie.
The concept of market makers can be perceived as bad when considering large traders. However, all traders using Limit orders are essentially market makers. Market makers are very important to an asset and are also called liquidity providers of the market. The liquidity of the market is a positive thing in many ways. Because there are too many limit orders in a liquidity market, it allows us to easily buy/sell the asset we want to buy/sell. A liquidity market can attract many traders and new investors emerge. In this way, the market may be more active and an increase in prices may occur.
The Market Maker concept can also bring good returns to small traders if learned well and nicely. Thanks to a good technical analysis and a well-priced order, every trader can make a profit.
Question 2
Explain the psychology behind Market Maker. (Screenshot Required)
Traders trade for one purpose, both in real life and in the financial market; make a profit. So how is this profit made? To make a profit, we must first buy an asset at a cheap or affordable price and then sell that asset at a price above the price we bought it. This is true in real life in the financial market.
Psychology is very important when buying and selling financial assets. Because unlike real life, buying and selling transactions in financial markets are both easier and faster. Therefore, we need sufficient knowledge, sufficient technical analysis capacity and a sound psychology before executing a trade.
In the previous section, we gave information about market makers. This information includes for market makers; We have defined it as “Those who set their own prices, negotiate the price and provide liquidity to the market when buying or selling an asset”. We have said that the general aim of market makers is to make a profit, they generally do this in two ways; They sell an asset they bought at a higher price or manipulate the market to take money from small investors.
As soon as Market Maker uses a limit order to sell an asset at a higher price, there is certain interaction in the market and encourages other traders to sell at a higher price. Because we all want to sell an asset we buy by making more profit. We can also call it a kind of herd psychology.
Because big investors (Whales) know this very well, they sometimes manipulate the market. They do this in two ways; They increase the price of the asset in order to sell the asset they have at higher prices, or they try to lower the price in order to buy the assets at lower prices. As we said before, as soon as limit orders are used to sell an asset at a high price, there is a certain interaction in the market and the price starts to rise. Likewise, they can place sell orders at lower prices to reduce the price. Small investors, seeing this, fear that the price will drop further and sell their holdings at a low price. Likewise, when they raise the price, they think that the price will rise more and they buy at higher prices. In either case, Whales prey on small or uninformed traders.
As we have said before, if we can fully understand the movements and psychology of market makers, we will stop hunting whales and get our share of the pie. For this reason, we must do our trades in a more knowledgeable and more accurate way and avoid being bait.
Question 3
Explain the benefits of Market Maker Concept?
The Market Maker concept has positive benefits on the market in many ways. Let's talk a little about them:
Market makers provide liquidity in the market thanks to the limit orders they place. In a market with high liquidity, we do not need to wait long for buying and selling transactions. It makes our orders come true faster.
Since it provides liquidity on the market, the bid-ask Spread is low. In this way, the transactions we carry out on the market take place faster. Price gaps are reduced during instant buying and selling.
It enables small investors to be active in the market. A market with a low Bid-Ask ratio means high liquidity and therefore small investors have the opportunity to buy and sell.
In a market manipulated by large investors, a knowledgeable trader can make good profits if they realize this. This actually applies to every trade, because in our trades we usually try to anticipate the movements of large investors (whales) rather than small ones.
We said that market makers provide liquidity in many markets. A liquidity market has always managed to attract new investors. Reasons such as the ability to trade quickly and the low Bid-Ask spread rate attract the attention of traders and this affects the number of investors on the asset.
All the reasons listed above; liquidity of the market, bid-ask spread, number of investors, etc. effects cause the price of the asset to rise. Because the price on the market varies according to the law of supply and demand. The more an asset is bought, the higher its price will be. The more an asset is sold, the lower the price will be.
Question 4
Explain the disadvantages of Market Maker Concept?
The Market Maker concept has positive benefits on the market in many ways. We talked about these in the previous section. However, as everything can have positive and negative aspects, the Market Maker concept also has disadvantages. Let me examine them now.
As we said before for Market Makers with large funds; They can manipulate the market. In this way, they can pull the price up or down as they wish. This can cause many traders to lose their funds.
Market makers with large funds cause small investors to lose their funds with their manipulations. Therefore, they can negatively affect the number of investors on the market. They can cause many investors in the asset to decline.
Since they can manipulate the price whenever they want, the price may fall and rise more than necessary. This situation is undesirable. Either way, it can cause investors to stay away.
The liquidity provided by market makers is usually not permanent. Because they generally make short-term profits and withdraw from that market. Therefore, a market maker withdrawing its funds will cause a decrease in liquidity.
Question 5
Explain any two indicators that are used in the Market Maker Concept and explore them through charts. (Screenshot Required)
Technical indicators are tools that help us do technical analysis. Technical indicators generally allow us to examine price movements more easily without the need for mathematical calculations. In general, they allow us to follow trends, predict future movements of price, and give us traders signals of the right places to buy and sell. Indicators also allow us to know if the market has been manipulated.
Exponential Moving Average (EMA)
In general, this indicator gives us information about the trend by following the average movement of the price between the time periods we have chosen. Generally, the selected time configurations are determined according to the type of trade we will do. E.g; It would be more correct to use EMA12 and EMA26 in our short-time trades. In our long-term trades, it would be more correct to use EMA50 and EMA200. It can also give us buy and sell signals at some cut points. Let's take a look at these;
- If our EMA lines are moving above the price, it indicates a downtrend.
- If our EMA lines are moving below the price, it indicates an uptrend.
- The short-period line crossing our long-period line from the top down gives us a sell signal. (Death Cross)
- The short-period line crosses our long-period line from the bottom up, giving us a buy signal. (Golden Cross)
I will use the platform Tradingview to demonstrate adding our EMA indicators to our chart.
- First we go to the Tradingview platform.
- Then we open the graph of a couple we want.
- Click on the “Indicators (fx)” section on the chart. Then a drop-down menu welcomes us.
- In the menu that comes up, we write Exponential Moving Average in the search section and choose what we show from the option that appears. Since we will be using two EMAs, we need to double-click the result in the selection section.
- Then we successfully add our two EMA indicators to our chart.
- Then we enter the settings section of our indicator for the configuration settings.
- Then we perform the color and length settings.
- By following the same steps, we make our configuration settings for EMA200.
In the screenshot above, the EMA indicators and the buy and sell signals are shown. (Golden Cross, Death Cross)
Relative Strength Index (RSI)
To briefly describe the RSI indicator;
It allows us to see the overbought and oversold points on the market. When the price reaches overbought and oversold points, it signals a trend change. It also plays an important role in determining the correct entry and exit notes in our trades.
The RSI indicator has a value between 0-100 values. In general, our RSI indicator; Below 30 is an oversold zone, above 70 is an overbought zone. The price entering the oversold zone tells us that the asset is oversold and informs that the direction of the trend will change. So when the RSI indicator enters the oversold region, it gives us a buy signal. Likewise, when the RSI indicator enters the overbought zone, it tells that the asset is overbought and indicates that the trend will change. Therefore, it gives us a sell signal.
I will use the platform Tradingview to demonstrate adding our RSI indicator to our chart. It is no different from adding the EMA indicator.
- First we go to the Tradingview platform.
- Then we open the graph of a couple we want.
- Click on the “Indicators (fx)” section on the chart. Then a drop-down menu welcomes us.
- In the menu that comes up, we write RSI in the search section and choose what I show from the option that appears.
- Then we successfully add our RSI indicator to our chart.
- The above screenshot shows the RSI indicator and Oversold/Overbought zones on the Chart. As you can see in the screenshot, the trend changed after the price entered these regions.
Conclusion
I think we have given all the necessary information about Market Makers in this lesson. When it comes to market makers psychology, we all have lost a lot in the early days when we started our trade, both because of lack of knowledge and because we did not fully understand market psychology. At the same time, we have suffered losses due to the manipulation of the market. I'm glad I was able to show you a little bit of something in this lesson. We should all be more careful during our trades and analyze the market well. At the same time, we should improve the accuracy of our trading by using indicators.
This course was a useful course for many people in many ways. Even though we all know some things, there have been some among us who forgot and new learners. I would like to thank professor @reddileep for this beautiful and instructive lesson and everyone who read my post. I wish you all a healthy and beautiful day.
CC: @reddileep