In-depth study of market maker concept, steemit Crypto academy S4W6, home-work Post for @reddileep.
INTRODUCTION
Trading has various facets, you can trade the crypto Market, you can also trade the forex Market, liquidity runs in the market which means you are trading to maximize profits and accumulate wealth within your rank.
Liquidity is what keeps the market moving and they are provided by various financial institutions, banks, and all the rest, those who provides liquidity into the market has a name and they are called themarket makers, at this point let's proceed with the subject of discussion for today.
Define the concept of Market Making in your own words
Market making can be defined as a process of ascertaining the price of assets thereby providing liquidity, liquidity are cash which runs on the market and they are been provided by the market makers, this market makers are seen as banks, and other financial institution's.
Market maker's usually galvanize a means to suite the buying and selling request for traders in the market, let's say for example an investor wants to buy cryptocurrency Steem, in a decentralized Exchange DEX, in there order book is required to facilitate trading the Crypto in pairs.
The order books shows the various prices at which traders wants to buy or sell their Crypto it's all about matching orders which includes buy and sell orders, below are order book showing buy or sell orders.
There are so many Crypto Exchanges today and they deploy professional traders looking like a broker or financial institution in order to provide liquidity, because without liquidity Market can't move/Excel.
When liquidity is been provided what it means is that parties will be involved to trade along with at this point bid ask orders will then be provided that will aline with the various orders provided by the traders.
The systematic process used in pumping liquidity into the market is called market making, and the various institutions that provides liquidity are called the market makers.
Explain the psychology behind Market Maker. (Screenshot Required)
Physcology behind market making is more like knowing the functionalities of a market maker, and knowing how they make money. Here I will explore a clear example of that.
As you can see vividly from the image uploaded you will see the volume in 24hrs, the ask price, and the bid price, market makers bears the risk of uphold assets after it has officially been bought although they are been compensated in a long run.
If a market maker buys an assets they are compelled to hold it, and it can decline along the process after it has been bought by the seller, then later it will be sold to the buyer.
Market makers usually make profits courtesy the spread they charge, let's View the example above you will find out that the bid price was seen as $0.085942, and the ask price of $0.086354, from this figures the broker bought a stock at 0.000412, and sells higher but do doing little spread has toped and the spread is seen as $0.478.
Explain the benefits of Market Maker Concept
Every good things in life comes with intensed benefits and market maker concept can't be an exception, courtesy this question I will be Exploring all the various benefits one after the other.
Since market makers takes risk on holding assets they usually benefits alot becau they are usually compensated, let's say I bought a security, the value may decline courtesy it's purchase level and it May be forced to sell to a different buyer.
Market maker profit from the bid ask spread, since they provide liquidity that runs in the market
The structure at which an exchange operates are been set by the market makers, this helps to structure the Smoth pace of various orders placed.
Market markers usually quote Price at which Investors can exchange bid for, at the same time ask for, they benefit alot courtesy the fact that they quote volumes that they intend trading with.
Explain the disadvantages of Market Maker Concept
Everything that is sweet on the other hand seems bitter, despite the fact that market makers are saddled with the basic responsibility of providing liquidity that runs in the market, there are also disadvantages, and I will explain below.
- market makers orders may bounce on you thereby trading against you, market makers order are complicating sometimes.
A market maker can easily manipulate currency prices, market makers can manipulate the currency quote courtesy other Market rating.
Most times market makers scalp prices, this insinuates that the various orders proposed May decline whenever filling orders is imposed, filling the orders in the price they want May be freezed.
some Market makers shows terrible bid/ask prices most times, although it differs, if you compare market makers you can ascertain the difference in bid/ask prices, you can even decide to go for ECN.
Explain any two indicators that are used in the Market Maker Concept and explore them through charts. (Screenshot Required)
As we all know Indicator's are used for price confirmations, they tell us the shape of the market knowing your entry and exit points, as we speak today there are over 800. Various Indicators, courtesy this question I will be exploring just two used by market makers.
Moving Average
Stochastic
Moving Average
This Indicator is basically used to detect trends in the market, the Indicator moves as trend move so they both works in conjunction with each other, moving average Indicator can also be used to produce signals in the market.
Calculating the moving average you sum up the various data points, and bisect it with the number of periods, let me apply the moving average to chart so that we will understand much more better.
This Indicator are used by traders to detect signals just as I have said previously, now looking at the chart above there is a buy signal the moving average is pointing down courtesy that there is a potential downtrend, so you can easily enter for a buy.
The pair is STEEM/BTC and buy signal has been generated, another important thing to look up to here is the structure, from the chart uploaded price will still go bearish to restest the previous structure thereby forming a W formation.
stochastic
This is practically a momentum Indicator, that compells a closing price of assets over a specified period of time, the speed of this oscillator to market structure is reductive what you need is to make amends thereby adjusting the period or you can as well take the moving average as the final result.
Market moves at a higher speed that is why the oscillator, stochastic is very much preferable by various traders, it moves as market makes various highs and lows, so you can easily spot out entry and exit points, I will show a chart below and it will be used to detect signals.
Generating entry and exit points courtesy the chart above you will understand that Market is in bullish phase which means you don't buy at the upper level, the resistance level, traders collect their profits out there.
So you as an experience trader what you need to do is to sell the mark down waiting for retracement and you explore your snipa entry, until the market comes down to the support level where you can comfortably buy it up again.
CONCLUSION
Summary of my homework task, I was able to highlight that market making is the process at which the price of assets are ascertained, thereby providing liquidity in the volatile Market, liquidity are cash that flows in the market and those that provides the liquidity are called the liquidity providers, they includes banks, and other commercial institutions.
moving forward I was able to highlight the
Physcology behind market making, where I clearly stated that physcology behind market making are more like knowing how market making works the benefits and all the rest, maker maker buys and assets and on the long run uphold it, you will find the ask price, and the bid price.they make profits courtesy the spread they charge, they can buy an assets for $100, and sell at $100.05, their profit here is 0.5, which on the long run is seen as the spread, this are pretty little example on how Market makers physcology works.
I highlighted various Indicators I also used then on charts to detect signals be it buying signals, or selling signals, you will agree with me that price moves in conjunction with the Indicator, many thanks to you professor @reddileep