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

Hello Prof @reddileep!

i am glad to participate in this weeks crypto academy homework task , your lesson was well comprehended and impactfull in my next trade , below are answers to this weeks homwork task:

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

Market making is a crucial process in the cryptocurrency market that provides liquidity for an assert, this is mostly done by brokers or some individuals who provides options like buy and sell to traders , once a trader buy the cryptocurrency assert the makers will receive the order and sell some of their assert they have invested to complete the order.
Market making helps to provide a smooth liquidity in the market such that an assert cam be sold or bought easily without tempering with the market stability, there several market makers in the system which leads to a competition among them so market makes display for traders a market quote at which they ask and bid the assert for, this will attract traders and investors.
Basically Market making is a process whereby makers participate in providing assured liquidity in the crypto market and also given platforms for traders and investors to trade.

This maker make profit by the differences between the bid and ask price they offer to traders and this is popularly known as Spread, a maker can buy at $100 dollars and sell at $110 in this case they will quote the assert as 100/110.

Explain the psychology behind Market Maker.

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The Psychology of market maker in the crypto market can be attributed to the quote that traders follow up to bid and ask for an assert, mostly we attribute the volatility of the market to a random movement but one must note that the buy and sell orders placed by several traders affect the movement of the market.

When market makers place their quote for an assert let say 100/110 traders and investors will make sure they place their orders within the same range hence we can say the action taken by the market makers has affected the traders psychologically.

In the crypto market we have some people we call whales this are traders or investors who can purchase an assert at large amount, this actions can also cause fluctuations in the market which turns to affect some traders to sell of their positions, when the market recovers from it actions then the traders realizes their mistakes.
So basically we all understand the fact that market makers provide liquidity for the market.

Explain the benefits of Market Maker Concept?

• It helps in increasing liquidity and make the order book active: due to the fact that there is competition among the various brokers in the market they tend to offer good bid and ask prices to traders to use their platform hence this maintain a particular constant volume flow in the market.

• It brings about moderate price volatility: Since there Is a range of trading among the traders, fluctuation in the market is lowered as well

• It helps traders to discover price in the market easily: Makers display on their brokers the BUY and Sell prices of an assert and the order book as well comprises of BID and ASK prices as shown below hence identifying prices by traders will be easy

• The exit an entry price of traders will be in an orderly form: in trading quitting is easy since traders will be provided with such information they will read the price actions in the order book hence they are safe.

Explain the disadvantages of Market Maker Concept

• They sometimes act as both brokers and dealers hence this goes a long way to penalize the traders, the broker side of the maker will provide the trader with good execution price while the Dealer side of the maker want the hopes the small traders loses for them to gain, this calls for investors to be cautioned on which broker they deal with

• False signals: it is known that some makers provide fake information about the market to get people who are in the market with less experience to execute action in respect to the information they have received hence they lose to the broker

• The market maker can temper with price of an assert by withdrawing all their investment, these makers are not controlled by a regulation hence this affect the liquidity of that asset unstable.

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

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Due to the self interest conflict some makers will want maximize their profit by making small traders lose their investment, they o this most at time depending on some indicators in this context I will be explaining two of these:

• Relative Strength Index: this is an indicator that id uses in technical analysis to measure the magnitude of the market momentum, this indicator action help traders to know if the assert is been overbought or oversold.

RSI has a scale that ranges from 0-100 and this help us to determine what is happening to the market , when the value of the RSI is at 70 and above we say the assert is overbought on the other hand when the assert is oversold the RSI will be at 30 or below, when ever we record an oversold and overbought it tells us there will be a price reversal hence traders in that particular sell their positions or buy more depending on the analysis they made.

Makers try to use this indicators to give false signals to traders such that the indicator might show an oversold sign making traders to start buying and expecting an upward trend after they have invested the price continue to drop down , this can also happen on the other hand , let consider the image below :

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In the image above we can see clearl that the down trend for a one day chart was faked and later on the upward trend continued , so assuming a trader entered the market and sold his position due to that signal and later on the trend moves continues , he will regret and it will be too late.

• MOVING AVERAGE : This is an indicator that is used to determine the trend direction of a particular trend , this tool is used to calculate the support and resistance of an assert , it got the name average from the ability to add up all price points of an assert over some period of time also divide them by the number of data to reach an average , it continues it calculation till the current price.

When the moving average is found below a price it indicates an upward trend and when it is above the price it tells us there will be downtrend , makers use this as well to give price quote because the indicator is not perfect so when there is sign of false signals new traders will buy from makers and later on lose when the price continues it trend lek check this out :

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The chart above also show how fake signal are shown , if you leave the market without proper analysis you will loose or exist the tarde at an unexpected point this will be a plus for the makers.

In conclusion let me thank crypto prof @reddileep for this lesson , infact learning how makers work and how they use some indicators will help me in my trading activities , finally let me thank the steemit team for tis great work by imoacting knowledge into us.

THANK YOU