[In-depth Study of Market Maker Concept]-Steemit Crypto Academy | S4W6 | Homework Post for @reddileep
QUESTION 1
Define the concept of market making
Concept of Market Making
In very simple words, we see the market making to be a scenario in which an individual quotes two sided markets in a particular asset. This is achieved by provided the bid and the ask price which is done along with the market size of each of them.
Example of market makers includes;
- Retail
- Institutional
- wholesale
So those who carry out the concept of market making are known as market makers and with this concept, they provide huge liquidity as well as increasing the depth of the market. The question now is, how do they make their own profits? Well the main idea participating in the financial market is all about making some profits for yourself, so the market makers uses the concept of the market making to profit from the differences between the bid and the ask price which is known as the bid-ask spread.
Let’s go now practical to explain how the market makers make profits;
Let’s say an individual observes the bid price of an asset to be $10 and the ask price to be $10.05, this shows that the quoted which could be a broker is purchasing the asset for $10 and selling it to relative buyers for $10.05.
QUESTION 2
Explain the psychology behind market maker
Psychology Behind market Maker
We know the market psychology to describe the overall sentiment behind the market trends and the price action. Market makers greatly influence the market trends and the price action through the actions in the market. We also see the market to be greatly influenced by the whale manipulation which I will be expatiating on soon.
The psychology of the market maker is created with the numerous buy and sells orders created by traders following an order created by a market maker. Let’s begin by explaining with an example; let’s take for instance that a market maker maker opens an order for a buy at $200 and also create an order for $202, we see that retail traders will now create orders in this range of $200 and $202.
How is this then related to the psychology of the market? With this orders created by the market makers, they have added liquidity in the marker with the usage of the sell and buy orders created by them.
I earlier explained the aspect of the whale in the market. This is often known as the whale cycle. With the huge purchase of a particular cryptocurrency, we see that the whales can move the market vey swiftly by inducing high volume in the market which makes retails join the trend at the wrong point which could be a distributive phase, and we see the whale selling off their holdings leaving the retail traders in the market which causes high losses as they take away the volume of the market.
QUESTION 3
Explain the benefits of market maker concept
Benefits of Market Maker concept
There are numerous advantages with the concept of the market maker which I will be explaining in point form below.
The market maker brings about competitive spread. With the aspect competitive spread, we see that the spread can be kept reasonably fair. This is solely because of the competition that is made between the market makers which can conclude by saying the competitive stress is guaranteed.
The confidence built with investors. With the concern created by market makers to analyze a particular asset which makes the asset worth investing in as it builds the investors’ confidence.
The concept of the market making brings about continuous trading though the creation of numerous entry and exits points which increase the liquidity of the market.
QUESTION 4
Explain the disadvantages of market maker concept
The disadvantages of market maker concept
In as much as there are advantages. So are they drawbacks with the concept which I will be listing below.
The market maker concept brings about a conflict of interest. The conflict of interest is brought about the action of the different bid and asks prices created by the different market makers.
There is also the aspect of unfair profits. With the unfair profits we see that market makers are known to hidden information which are hidden from the general public with the common name as the insider trading.
There is the aspect of the impact market integrity which I will be concluding with. With the actions of the market makers we generally see that it affect the market psychology which involves the trend of the market and thus this is brought about by affecting the market negatively with a risk of investing.
QUESTION 5
Explain any two indicators that are used in the market maker concept and explore them through charts
Two Indicators used in the market concept
1) The Simple Moving Average Indicator
I will begin with the moving average indicator, the moving average indicator is known to be a trend based indicator which indicates the future movement of prices, the usage of the moving average is very simple and straight forward. It is known to be an indicator used by many traders so this always increases the probability in its usage.
A buy signal is shown by the simple moving average when we have the price just moved above the indicator line and a sell signal is shown when we have the simple moving average line just moved below the indicator line. We can see the confirmation in the screenshot below.
Now in the market making concept, we see the moving simple moving average indicator portraying fake outs which is being manipulated by the market marker. This is shown in the screenshots below.
2) The Relative Strength Indicator
The relative strength indicator is an oscillator indicator which is used in the market to detect potential overbought and oversold regions. We see the relative strength index indicator to be one of the most used indicator in the financial and crypto world which obviously is used by market makers in manipulating the marker.in a buy a scenario, the relative strength index indicates a signal by crossing the 20 level indicating and oversold which is caused by a shift in the market from sellers to buyers while the sell signal is shown by the indicator line crossing the 80 level which shows a shift from buyers to sellers. This is described in the screenshot below.
Now in the aspect of market makers we can see the manipulations as portrayed in the screenshot below.
Conclusion,
Market making is a concept portrayed by market makers which is shown by buying and selling a particular asset at the same time creating a boundary for other investors and retail traders.
We have also seen the aspect of psychology behind the market maker in the market as well as the advantages and the disadvantages of the concept of market making. Through the relative strength indicator and the simple moving average, I have demonstrated the aspect of the market making.
All screenshots from TradingView.com unless otherwise stated
CC: @reddileep