Crypto Academy Season 4 | Intermediate Level Course for Week 6 : [In-depth Study of Market Maker Concept] by @reddileep

This lesson is completely based on the concept of market making and its factors and below is my understanding of the lesson

design by me from canvas

1- Define the concept of Market Making in your own words.

My understanding of the concept of Market making.
Basically in the world we live today, everything occurring is all about trading and in every trade, there are group of people or even a person who influence demand, price and other factors about an asset or commodity.
In the stock market /crypto market we refer to them as market makers and the process, as market making.

Firstly, the movement of market value of assets and securities isn't a mistaken event but occurs based on the effect of several parties in the market and these actions are what make up the concept of market making.
In my opinion, market trading could be termed as a trading pattern,geared towards gaining by making liquidity available to other investors while profiting from the ask/bid spread and in this way, taking possession of a relatively huge part of an asset.

I also understand that market making is a common feature of brokerage house who provide investing opportunities for other traders to make sure that the currency markets remain liquid.
The gain from market making too comes from the compensation given to them for the risk of holding assets since there may be a reduction in value before it gets to the final buyers

I'll wrap this with a local example of a grocery shop who has a major customer who purchases a lot of groceries from the shop and pays in cash fully, here the grocery shop even pays the customer for the risk of the perishable nature of the items while the customer sells at his bid /ask price and can influence the price and trade movement of the groceries

2- Explain the psychology behind Market Maker. (Screenshot Required)

The psychology behind market making with screenshots :
The psychology behind market making from my understanding is that, the market makers struggle to create sales liquidity and depth in the market even as they gain from the difference between bid and ask spread.
We understand that the market makers, hold assets, get paid for risk management, and sell at bid/ask prices.
Therefore the drawn conclusion on market making is that the market makers pump liquidity into the market by their purchase of assets and gain for the risk of holdings even while they influence market values and positions

source.

image from tradingview

An example of this psychology could be seen in a case of Elon in the picture declaring a humorous relationship with doge coin ie being the CEO, we can relate to the bullish movement of Doge coin afterwards showing the pyschology of his making of the Doge market

3- Explain the benefits of Market Maker Concept?

The benefits of market maker concept include :

• Knowledge of their time of operation beings huge profits :This explains that when investors can tell when market makers are at work, they can maximise profit at this moment since they could buy, sell and trade profit yielding assets at that point.

• Buoyancy of the market :The market makers, leave the market in so much liquidity, therefore allowing trade activities to be more efficient and easy going (by being ready to buy and sell whenever and how ever)

• Promotion of infant /new coins in the market :When the activities of these marker makers leave an asset yielding much profit, and increasing its value, participants get attracted to the coin and tend to invest in it

• Market trades too are heavier and increased in volume with market makers since everyone is associated with a moving trend

4- Explain the disadvantages of Market Maker Concept?

The disadvantages of Market maker concept includes :

• The provided liquidity most times could be short term :This explains that the liquidity the market makers pump do not last for long most times since most markets are not controlled by a single authority.

• The excesses of market makers could lead to failure of a coin :When the market makers produce a huge sell order, petty traders could be intimidated and fearfully buy the assets at a lesser price

• The interest of market makers could clash with that of traders :Most times the offer of market makers could clash with that of traders since they could be against them

• The ability of market makers to influence prices,could make them shift the currency prices from getting to the traders aim /goals in making profit.

5- Explain any two indicators that are used in the Market Maker Concept and explore them through charts. (Screenshot Required)

Indicators used in the market making concept include :

• Moving averages
• RSI (Relative Strength Index)

Moving averages
Moving averages could be seen as indicators that show the average value of assets through a chain of their recent dated candlesticks. it aids to give a clear indication of the support and resistance level, it grows with a following trend so in otherwords it lags. it is a flexible indicator and investors can change it to what they want depending on they want

there are two major circles to note for when using the moving average which is the Golden Circle and the Death Circle

The Golden cross occurs when the short moving average crosses over the long moving average which indicates that there will be an upward trend in the market

The death cross occurs when the long moving average crosses over the short moving average which indicates that there will be a downward trend in the market

the above chart is a chart of BTC/Tether US pair at 45minutes, the two moving averages there are at 50 and 100 respectively, we can see the golden cross which I marked that was followed immediately by an upward trend. The market makers purchased the asset causing a rise in the market trend

RSI (Relative Strength Index)
This an indicator that is used to determine overbought and oversold in the market, the local way of reading this indicator that shows in a line format is very easy that when it is above 70, it is termed as overbought and when it is below 30 it is termed as oversold. it helps investors dictate a bullish or bearish trend on the market

so for instance if its goes above 70 the market makers are over buying the asset and viceversa if it goes below 30 the market makers are over selling the assets

we can see the chart above of the BTC/TetherUS on a 45 timeframe, we can see the RSI indicator showing regions of overbought and regions of oversold on the market trend which is an effect of the market makers buying and selling

CONCLUSION

The movement of the market everyday could intrigue novices in the crypto field but after this lesson, I think market indications and makers are no strange acts to me anymore since this lesson has exposed all to me.
My assignment too covers the scope the disadvantages and even the advantages of the market makers as they could be detrimental or helpful.
This lesson was a blast !

best regard
@reddileep