[In-depth Study of Market Maker Concept]-Steemit Crypto Academy | S4W6 | Homework Post for @reddileep
I invite you to also join and participate in this wonderful task.
1)🟢 Define the concept of Market Making in your own words.
Currently there is a lot of ignorance about the market makers in the cryptoassets ecosystem, many think that they are totally negative for our economy, just as there are others who think that we can take advantage of these market movements to obtain profits. And the truth is that it is a bit of both, since if we put it on a scale, we can see that market makers are a fair balance for the economy of a currency or the ecosystem in general, I will explain below why.
The market maker is the one in charge of creating movements or fluctuations in the value of a certain currency, whether they are operations that have a positive or negative impact on its financial structure, but taking into account its main objective, which is to provide liquidity to the market of said cryptoactive. Its mechanism begins mainly in the supply and demand that said asset may have, to then analyze its circulation and see how many tokens are available, and then create an order that causes a significant impact on the market, momentarily.
In this case, the market maker creates his own buy and sell order based on his own specifications, such as price and other tools that are critical to creating a significant impact on the trend of that currency. Then you wait for the flow of transactions to remain constant, and then obtain profits for it, whose profits that may not be so significant, but with a large number of transactions this can accumulate and create a large amount of money.
Most of the movements of market makers are executed by large investors who have relevant power over the ecosystem, or even large companies or platforms with great impact, that is why they take advantage of their power and shake the market creating a series of movements. positive and negative. What does this mean? Simply, if we know how to take advantage of the market maker's strategy very well, we can obtain profits for it, however, there is a very strong risk for this, since its price could fall and cause many losses, which is also part of the market maker's strategy.
On the other hand, the market maker can execute an order that is higher than the current price of the asset, in order for the value of the currency to reach that stipulated value that the market maker wants to create. Then when the asset reaches that price, we can see how there are many people who sell quickly, who are satisfied with their profits, thus creating a lot of overselling, then investors who arrived late decided to enter the market thinking that its price could continue to rise However, after a while its value decreased causing significant losses.
Then we can see how in a positive and negative way the strategies carried out by the market maker affect the economy of a currency or certain assets. What we can say firmly is that its main objective is to provide liquidity
2) 🟢 Explain the psychology behind Market Maker.
Before the market maker launches his strategy, he analyzes for a stipulated time the behavior and the situation that is being generated in the market, with this he prepares his strategy based on psychology in order to master and create what He really wants to obtain, many times we do not realize it, but most of these great investors or whales play with the fear or FOMO of the users today, which is a feeling and a great weakness that they take advantage of for your strategy.
In this case, when the market maker launches his order based on a higher or lower price at which the currency is, that is where the psychology behind all this begins, since he expects there to be an over movement. buy or oversell so that the price he wants can be reached. If we analyze this mechanism very well, we can clearly see that more than once we have fallen for the strategies carried out by market makers, based mainly on the basis of the psychologist to play with our emotions and create what they really want.
In a similar way, it has very similar differences with the famous method known as "The composite man" or "The Wyckoff method, in which it is based mainly on the psychologist and the FOMO of the investors. We know that when we are introduced in this financial market, feelings cannot be present, we must think with a cool head and carry out our operations based on strategies or with the help of the many indicators that currently exist, since feelings in this kind of operations it can lead us to execute unwanted orders that can later lead to losses.
The most advanced investors in the market who have prior knowledge of this psychologist applied by market makers, have two options:
Take advantage of this strategy for profit
Ignore it and go against the market makers
If we analyze very well and are aware of this strategy, we can make the most of it in order to make some significant gains. In most cases, small investors base their analysis on the fact that the sudden fall or rise of a certain asset is mainly based on over-buy and over-sell orders, in part this is the case, but what they do not know is that behind that there is a manipulation based on psychology on the part of the market makers, to make us believe that.
Some of us have all gone through this, and it is completely normal, since in a certain part they provide liquidity to the market, but if we already have enough time operating in the world of crypto assets, we can see that there are many tools currently to determine this type of patterns in the market, making the most of this strategy.
The illustration that we saw earlier is based on the psychology applied by the market maker, which consists of three stages as it appears in my illustration:
1) In the first stage we can see market makers or large investors planning and executing their strategy, which is based primarily on analyzing and studying the market and people's behaviors to base their strategy on that. .
2) After having completed their strategy, they must take it to the market, in this case the second stage begins, which is where market makers add liquidity to the value of a currency, either in buy and sell orders. .
In a centralized exchange we can see your distributed ledger where we can clearly see the volume and the purchase and sale price of a certain asset. This is when the market maker launches his strategy and waits for him to have results in the market.
3) The third stage is based on buyers, where they get carried away by overbought or oversold and decide to make a position in the market for that currency, debating whether it is the right thing to do or not. However, the strategy of the market makers has already been executed.
We can see how the mind plays a fundamental role in people's decision-making, therefore, psychology plays a fundamental role in the strategy of these investors.
Through my illustration we can see the three stages that happen in this case.
3) 🟢 Explain the benefits of the Market Maker Concept?
Not everything seems to be bad, since as I mentioned earlier, market makers can create strategies that can bring us benefits, some of them are:
• This strategy can help the price of an asset suddenly reach a bullish tenure, which can be of great help to investors who have that asset in their portfolio, increasing their profits in a completely satisfactory way.
• It provides liquidity and movement to the market of a certain cryptoactive, which in part is of great help, so that the purchase and sale orders remain constantly and in circulation.
• The different strategies of market makers, can help to some extent to the stability of the price of an asset, by adding sufficient liquidity to your market. Although we know for a fact that this market is extremely volatile, this can nevertheless help a great deal and be useful.
• If we have prior knowledge about this, we can make the best profit on it, since we can determine the decline or decline of an asset for sure, taking advantage of both trends to our benefit.
• It gives us knowledge and breadth in the area of financial markets, making us more aware of market movements, to avoid losses and generate more profits.
• It helps with the constant circulation of transactions in the market of an asset, which can be of great advantage if we know how to take advantage of it well.
Let's not stay closed to the idea that the market maker only makes his strategy to cause us losses, since if we study it and analyze it very well, we can see that we too can get the best profits from it, as well as obtain the knowledge necessary to avoid losses.
🟢 4) Explain the disadvantages of the Market Maker concept?
At this point, we are going to talk a little about the disadvantages that the market maker causes us:
• They play with market conditions and behaviors, to manipulate us and make us believe in false strategies that cause us many losses.
• Market makers can create their strategies as long as they want, as there is nothing to restrict or slow down their operations.
• They may be able to manipulate the price according to their preferences, and due to our previous ignorance on the subject we can cause us to lose our profits.
• The liquidity of an asset can last temporarily, that is, while market makers create their strategies, therefore when enough liquidity runs out, this can cause a devaluation in the market of a currency.
• Conflicts can be caused in the market by advanced investors who know about the strategy, by large crossbows or large investors
• They take advantage of the ignorance of small investors, in order to make them spend small amounts of their money, which can enrich the market maker for all the orders that are constantly executed.
Now that we know more about this strategy, we can investigate and analyze the patterns that can help us so that we do not fall into this mechanism that can cause us losses. Today there are many methods that help us predict this type of behavior, such as the help of indicators or technical strategies, we just have to carry out the appropriate study for it.
🟢 5) Explain any two indicators that are used in the Market Maker Concept and explore them through charts.
🟢 Moving average
The moving average indicator is widely used today by millions of investors around the world, it is very easy and flexible to use, as it helps us detect false signals that may occur in the market of that currency, either short or long term. These moving averages are created with data from past trends, that is why it is said to be a lagging indicator, since when a new trend begins, it indicates the next movements.
However, so that we can get a good prediction, it is important that we combine it, that is, that there is a moving average that is used in the short term and a long term one. The best statistics to work in this way are with the short-term moving averages at (50MA) and with the long-term moving average of (200MA), where it indicates that:
• If the short-term moving average (50MA) exceeds the long-term moving average (200MA), it means that an uptrend is approaching. This mechanism is better known as golden cross, that is, a buying trend.
• Now if the long-term moving average (200MA) passes above the short-term moving average (50MA), it indicates a sell signal, which tells us that a fall in its price may be approaching. This mechanism is better known as death cross.
So in this way and thanks to the combination of the short and long-term moving average indicator, we can determine the next strategy of the market maker.
• Example:
In this case, I am going to present an example of the asset (BTT) together with the parity of USDT, that is, BTT / USDT.
As we can see, I added my combined moving average indicator with short and long term lines of (50AM) and (200AM). In this case, the blue line is the long-term moving average, and the red line is the short-term moving average.
If we look closely, we can see that our long-term moving average (200AM) exceeds the short-term moving average (50AM), this means that we are in the death cross mechanism, where they indicate that a downtrend is approaching , therefore, it is a sign of overselling.
The market maker had already added sufficient liquidity to the buy orders, therefore, he decides to sell his profits and cause liquidity in the sell orders, which is close to a downtrend, causing thousands of investors to lose profits thinking that its price could sure rising.
🟢 MACD Indicator
The MACD is another of the incredible indicators that are used to predict or calculate the next market trend of an asset, however, its main characteristic is to measure the strength of the next trend, that is why it helps us to predict when we can enter or exit the market, to avoid losses and obtain profits.
To achieve this, we must analyze the moving average convergence line with which MACD works, together with the signal that it provides in the indicator, this analysis is carried out as follows:
• The ** blue ** line is the MACD line of the indicator, which helps us to predict that when it exceeds it with the ** orange ** line, it indicates an upward trend.
• Now on the contrary, when the signal line (orange) passes the blue MACD line, this indicates a sell signal.
In this way we can clearly have the strength of the next approaching trend, since as we know, like the previous indicator, the MACD is also a ** lagging ** indicator, which measures the strength with the data of the Previous trends, therefore, this indicator is applied when the next signal occurs in the market of a certain asset.
• Example:
In this case I am going to present the following example to explain how the MACD indicator is used, under the same cryptographic pair as the previous one, BTT / USDT
We can see that the blue line of the MACD indicator exceeds the orange line of the signal, which means that our indicator is measuring the strength and divergence of the uptrend, this means that the market maker added sufficient liquidity in orders purchase to reach the stipulated price that he wanted.
Now that we know the different strategies that the market maker can use, we can say that with the help of certain technical indicators we can try to predict or calculate their movements, managing to take advantage of this situation and generate profits.
Conclusion
We have reached the end of our task, where we were able to speak in depth about market makers, as well as the impact they can cause in the cryptoassets ecosystem. It is a very interesting and instructive topic that all merchants must take into account today, that is why I thank professor @reddileep for this wonderful conference full of many learnings.
• Nowadays it is difficult to predict the movements that the market may have, since as we know its trend is usually very volatile, and for sure we cannot calculate its price exactly, however, thanks to technical indicators and strategies we can predict the upcoming trends, helping us to position ourselves in a better way in the market.
• We do not get carried away by the emotions that always cloud our judgment and make us make wrong decisions, we must bear in mind that the cryptoactive market is driven a lot by reverse psychology, that is why we must be careful when making a large operation with our assets.
• Let's investigate and analyze very well about the different advantages and disadvantages that the strategies of market makers can cause us, therefore, let's balance everything on a scale and get the best out of it.
So far my homework has come, until next time.