[In-depth Study of Market Maker Concept]-Steemit Crypto Academy | S4W6 | Homework Post for @reddileep
A big greeting to the moderators of the community as well as students and teachers of the academy, this is my participation I will deepen each of the slogans raised by Professor @reddileep the star topic of today Market Making.
1- Define the concept of Market Making in your own words.
In the market liquidity is generated through the interaction of investors, therefore it is the result of these that generate liquidity in the market called (Market Maker) these users generate orders to buy or sell that are limited and this will depend on the decision taken by the user according to their need to buy or sell in the market.
At the same time the Exchange provides a safe and reliable platform that will serve as an intermediary between buyers and sellers, this platform obtains benefits with low % for each transaction generated by the users that through the Limit operations of Market Maker generate liquidity in the digital ecosystem.
Let's visualize a graphic of a worldwide recognized exchange Binance.
We can see the order book and at the same time a separation of prices between them, this is where buy and sell orders are generated as users see the intentions of the market.
We can observe that the Market Maker orders that are placed by the users that interact in the digital ecosystem are constantly placing buy and sell orders, which generates great volatility in the market and at the same time generates a liquidity in the case that only the limit market existed, it would not have so much volatility and it would take a long time to complete each operation, that is to say, we would have to wait for another user to match the offer of the creator of the offer for it to be executed.
2- Explains the psychology behind Market Maker. (Screenshot required)
There are many factors that influence as to the psychology of Market Maker all this so that the market is manipulated by a group of investors or ( the whales ) that incorporate programs that are responsible by powerful algorithms to seek orders to be executed for their own benefit, ie that can be manipulated inside and outside the market. already I will explain.
The project in which we are operating will always want to seek liquidity, therefore creates news that generate some kind of frenzy among the community could be of fomo or conversely FuD for this to have some kind of drastic and volatile movement. as there are two sides one of bears and the other of sharks, some want the trend to be bearish to buy as low as possible and others want the trend to be bullish and each group is waiting their turn to inject liquidity.
So this is where psychology plays a very fundamental role in the ecosystem, the developers want to control all the movement of their currency or tokens, within the digital system, which is why this type of activities mentioned above are generated.
Each buyer and seller will believe that the next movement will be given in their favor and some are so convinced of this that do not measure the amount of capital to invest, have no strategy to support them and go all in, it turns out that everything turns 360 degrees and goes to the other extreme when you buy at some peak and expects to continue rising but this turn and falls the user panics and sells serious mistake that many novices make. here psychology is a fundamental factor and that is why it is said that operating without feeling is the healthiest for trading.
In the graph above we see a serious error produced by the psychology of the market, where through the fomo make people or new investors buy and then the (whales) liquidate everyone this creates panic among the community and just in that red candle and long sell. this makes you lose too much money. we see that liquidated 2 times prior to a large rise this generates distrust in the project and is where the whales return to buy very cheap and then take profits x3 or more in the future.
Therefore it is my recommendation to operate with a cool mind and follow a clear and precise strategy follow the patterns and perform technical analysis on each graph for each operation taking into account the amount of capital to invest you have to diversify and not bet everything on the same rabbit.
3- Explain the benefits of the Market Maker concept?
Liquidity is one of the major benefits found within the Market Maker concept, this is created by the transactions that are generated within the market by users who constantly create orders.
The prices can be adjusted to the taste of each investor in order to create orders depending on the path and needs of the investor.
Any investor has control of the prices, thus being able to place orders at any price that suits him.
Both the investors if they make the right decision and the platform where you are trading benefit from the commissions.
If we follow a trend and make a good technical analysis we can use the price separation to make money by buying at a lower price and selling at a higher price in this way we are carrying liquidity and making profits as well.
4- Explain the disadvantages of the market maker concept?
The psychological manipulation of the market by whales who use the powerful programs to execute a trade or make users believe that an uptrend or downtrend is coming in order to take profits from them.
The commissions per se are quite cheap in some exchanges but when we make multiple operations we see that these are no longer so profitable so we have to change the method for those who are starting in the digital ecosystem.
Not all orders that are made in operations are liquidated as everything will depend on market sentiment and in turn the trend that is generated in the future. therefore speculation according to the analyzes are a key factor for operations.
5- Explain any two indicators that are used in the Market Maker Concept and explain them through graphs. (Screenshot required.)
The Average Directional Index "ADX" is an indicator that shows us the trend and strength of a chart both negative and positive, with this tool we can determine the trend and strength that carries the graph at a certain time.
The ADX or technical indicator fluctuates between the values 0 - 100 and it has a range of movement called (True Range TR).
When the ADX is between 0 - 25 it indicates a flat trend, it has no volatility (neutral).
When the ADX is between 25 - 40 it indicates that the volatility is increasing and there is already a movement in the next trend.
When the ADX is between 40 - 60 it indicates a very strong trend.
When the ADX is between 60 the movement is about to collapse.
Relative Strength Index "RSI".
This is one of the most used indicators by traders, to perform technical analysis in this indicator we can observe trends according to the relative strength of oxylation with respect to the graph, these oxylators move between 0-100.
When the RSI remains between 0-30 we say that there is an oversold behavior and the trend could change.
When the RSI stays between 70 - 100 we say that there is an overbought and the trend could change.
With the combination of these elements we can identify patterns such as the shark fin or shoulder head shoulder and determine whether a trade entry is recommended to use other indicators such as moving average and ADX to complete a good technical analysis.
We see that right now the Shiba inu has a flat trend in the market in the past we can say that when it was just at that same position the trend after that point was completely bullish of 398% of its value. and currently it is at that same point. are we can see The RSI below the 0-30 which indicates flat trend with flat directionality.
In the study capacity we can observe that the objectives for any investor is to earn profits, increase capital and this is achieved by making good decisions if we follow each of the actions raised in this research work I assure you that you will make good decisions for each operation raised by you, the activity of this task was performed achieving the objective with diciplona and constancy in this way achieve asserting in each of our operations more times than those of losses.