[In-depth Study of Market Maker Concept]-Steemit Crypto Academy | S4W6 | Homework Post for professor @reddileep
1. Define The Concept OF Market Makinh in Your Own Words
Market making: the term market making can be define as a process or a source of cash flow and profitability in the crypto currency market. Market making in other words maybe regarded as a two sided trades that bring about liquidity to the market.
It is a market scenario were a dealer sell a product for his client after buying same product from his client at a certain price.
For an example, buying of a coin from a middle man who had already purchase the coin from the inventor or investor and decides to sell it to you at his determine price or a market price (usually best offer) which he had influenced, because of this acts value of this coin increases.
A huge amount of capital is needed in order to fulfill market-making concept.For market making to occur a market maker is involved, in other context may be refer to as a larger bank.
A market maker may be an individual, an institution or a member firm who participate in a crypto exchange trading structure, he serve as a middle man( a wholesaler). When traders or other investors want to buy a certain coin due to the profit potential of the coin, the market maker take over the opportunity and sells the coins in his inventory.
A market maker buys at the best bid in a current market situation but sell at a best offer.
Also, market maker through difference activities provide Bid and Ask prices ( in tandem with large market order) this provide a large volume of trades in the market for investors to buy.
Hence, depth and liquidity is provided in the market and the market maker profit from the difference in the bid-ask spread.
For a example, consider a scenario where a market marker decides to buy a certain undervalued coin which have been in the market from an investor who can not make profit from the coin due to it low value. The market maker decide to buy at $7-$7.8, 70x100 from this willing investor.
What this means is that he wants to buy 70 pieces of the coin at the price of $7 and simultaneously offering to sell to other interested investors or traders at same 70 pieces for $7.8, He provide both bid and ask price which attract many investors and traders to buy the coin.
2. Explain the psychology behind Market Maker. (Screenshot Required)
The market in the cryptocurrency market do not act or operate in the same way. These persons operate from specific psychological point of views. There are a number of different market market makers. These include: institutional market makers, retail market makers, wholesale market makers.
The general idea behind these market maker psychology is the ability to influence the market situation that is, ability to tune or manipulate market conditions in a particular way to favour a class of traders while at the same time, their will culminate in losses to other traders and in most cases, the small capital traders are always the victims. They bear the brunt of the manipulative actions of these market makers. The market makers aim to produce pseudo signals which will draw retail traders to a particular direction.
Using the screenshot above, the technical indicator EMA, entice small traders to rush into the market. It has imprints of manipulation. Usually the occurrence of a golden gross ( that is when EMA 50 crosses over EMA 200), it is a strong signal that a trader should enter long positions. It is considered a sure trading signal by most theories. As such many traders, mostly amateurs and small scale traders, will jump into this kind of trade. However in the screenshot, we find that instead of going bullish, the price drops drastically in the bearish direction. Here, is an action of market makers exploiting the nativity of these retail traders to sell off their units with the availability of higher liquidity provided by the small investors.
3. Explain The Benefits Of Market Maker Concept
Benefits of market maker concept are but not limited to;
Market Maker Concept helps to increase the value and strength of a coin.this is achieved by placing a higher asking price.
market making concept help to bring about ease and fluidity of trades in the markets by making it very simple for investors and traders to buy and sell.
Market making concept help to provide a large volume of trading in order to accommodate many investors as well as traders.
Market making concept ensure that the market is functioning, this mean that each time a trader or an investor want to buy or sell a coin there is always availability of coins for trading purposes at all time this being about liquidity.
Market making concept generate profit for traders who understand the market making concept and the behaviour of the market as well.
Market maker provide timely trading information to traders and investors through constant update of their buying and selling prices to reflect the market conditions, i.e. supply and demand.
Market making concept helps to regulate market price of undervalued or overvalued coin. Since the control the market the can also increase the price of an undervalued coin
4. Explain The Disadvantages Of Market Maker Concept?
######Disadvantages of market marker are but not limited to;
Market maker brings about conflict of interest between investors and traders while executing orders, they may choose to trade against investors.
Due to the fact that market marker determine the market price the in turn create negative impact and risk which affect the integrity of the market.
Market marker generate fake signals which mislead genuine traders. This actions result in traders losing their suppose profit.
Market maker withhold vital information about the market from traders, this information could bring about unfair profit.
Market maker may manipulate the coin prices to a limit (stop) that prevent traders from meeting or reaching certain profit.
market maker sometimes charge a higher bid or ask price just to hike the price a coin.
Traders who do not understand how the market behave may lose their investment which becomes a benefit to the market maker.
5 Explain any two indicators that are used in the Market Maker Concept and explore them through charts. (Screenshot Required)
In the cryptocurrency market, market makers usually exploit some technical indicators in sending out misleading signal or information to the market. There are a number of these indicators that are usually employed for this. However, for this question, I will be using the Bollinger band and Exponential Moving Average indicators.
- Bollinger Band Indicator
Bollinger band indicator is very popular in the cryptocurrency market. A very large number of traders make use of it. Probably because of this direct and simple it is to use. Probably, this it why it is also a major target for manipulation by market makers.
The anatomy of the bands is made up of two major bands, the upper and lower bands. The movement of the price in relation to this bands is used by traders to decide how to operate in the market.
As price hits the upper band and breaks out, it is expected to proceed in the upward direction. Conversely, if price breaks out of the lower band, the normal meaning is that it will continue ita downward movement. Unfortunately, this does not always hold true as shown in the screenshots below. Sometimes, market makers tamper with these conditions such that the expected outcomes of these signals are not as they should be.
These situations are illustrated in the screenshots below.
- Exponential Moving Averages (50 EMA & 200 EMA)
50 EMA and 200 EMA are two very highly patronized indicators by traders. It is theorized that these two EMA are much more reliable and devoid of noise and wrong signals. But as we will see briefly, this is not always the case.
Many novice traders employ these two indicators and market makers being well aware of this, manipulate the market in their favour using the information from this signal. They make sure that they alter the market condition way against what the indicator in is showing. They ensure that the market forces are pegged against the information of this indicators and thus result in fake signals.
These situations are illustrated in the screenshots below.
Conclusion
The role of market makers in the market cannot be overemphasized since they help in contributing Liquidity to the crypto market. Though most of them make an average trader to most time go astray as they manipulate the market as they like, they still play a great role in the crypto market.
Thank you prof @reddileep for this great lecture.
Hello @davosimple Thank you for participating in Steemit Crypto Academy season 4 week 6.