Hello guys, it nice joining you all in participating in this weeks lessons in the intermediate lessons as presented by prof @reddileep on Market Marker concept.
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Define the concept of Market Marker in your own words.
The few times I heard about this concept, this is the only time I've understood it more comprehensively. These set of people play who are known to be market makers are really important in the sustenance of Market activities. Just as they are called market makers, they are Liquidity Providers whose activities help in revitalizing buy and sell orders in the market.
Market makers may be categorized to be an individual, group or persons, institution , brokers etc. In all there categories, they are driven by same purpose which is providing Liquidity in trade as well as making profits therein. This profit taking can be demonstrated by placing Bid and Ask orders in different platforms of interest. The little positive margins seen from both order types simply places the market makers on the path of profit.
Though being a market maker involves risk as the assets in holding capacities are usually observed to fluctuate in value. A decrease in the value of a given asset with a higher last UTXO simply means a loss in asset value but when current asset price is higher than the last UTXO, this means profit when bids/offers are executed.
A typical market maker would want to make profits and this may be at the detriment of the small retail investors in trade. Since they have the capacity to place both Bid and Ask orders, this could be manipulated at the expense of the smaller investors who's assets are drawn due to false market trends placed this category of people.
In a scenario where a market maker places Bid and Ask orders of $1 - $1.5 for 1000, 1500. This means for us that a Bid of $1 was made for 1000 coins and an offer for $1.5 made for 1500coins. This translates that market makers have the capacity to either increase the value of an asset or devalue same asset in a trade. So we have to be more proactive to know when this people are in the market early enough to take profit as well exit.
Explain the psychology behind Market Maker. (Screenshot Required)
In the cryptocurrency market there are trade activities that happens every second and minute of the day and this buy and sell activities or orders are powered by the market makers who provide Liquidity for this. Just as mentioned there are different categories of these market makers who are present in trade and their activities and capacity to drive trade is dependent on how much Liquidity they provide.
The more the Liquidity Provided in a market scenario, the more the influence therein. In most cases, the conventional market makers we have may not be able to Provide the required sufficiency required to drive market activities, and hence this institutional firms or whales are needed to drive market activities. This brings in the uncertainties and false or temporary Liquidity gotten from them.
The average market participants may believe that market activities are moved by the demand and supply as well as the Liquidity provided in the trade, yes that is true but the motive behind providing this Liquidity also come into play as most of these big market influencers are only interested to drive trade in such a manner to make profits.
The whales and big drivers of Liquidity have the capacity to determine market trend and in some cases false signals are pushed out which in turn increases selling pressure from other small investors. This is also characterized with determining the value of an asset as they wishes because of the ability to create Bid and Ask orders not tandem to market terrine.
Several Bid and Ask orders may be initiated and as well taken to impose a new normal for an asset. Below is the screenshot of what the Bid and Ask order book looks like.
Screenshot from Huobi Global site
Explain the benefits of the Market Maker Concept
Liquidity Providers
One of the primary and known benefit of the Market Makers concept is the unalloyed provision of the required Liquidity to drive market activities which invariably brings sufficiency of all traded tokens in trade. Cryptocurrency activities would have been incomplete without the presence of Market Markers.
Relative Price Stability
Since the cryptocurrency market is already observed to be highly volatile, insufficient or inadequate Liquidity won't be any good to the market. Hence the more Liquidity provided means a relative control observed in price movement.
Attracts more Liquidity Providers in it's Maker Concept
This helps in creating additional room for whales and bigger firms who would want to join the market Marker concepts . The presence of this set of bigger whales would mean more Liquidity available in trade
Fair Evaluation of Price
This concept brings a fair evaluation of pricing in the trade. There are no gaps or jumps rather a gradual precision of Price as it either appreciates or depreciates.
Brings Orderliness in Trade
Participants in trade are more careful while engaging the trade now. This is consequent to the available Bid and Ask orders which guide users on better entry and exit positions.
Explain the Disadvantages of the Market Maker Concept
Unregulated
Unlike the conventional forex market, the cryptocurrency market is not regulated and hence cannot be guaranteed at all times in market makers activities. They are not checked and transparency maybe be found wanting in some cases.
Capacity to Undervalue or Overvalue Asset
Since market makers have the capacity to create Bid and Ask price, assets in some scenarios can be greatly affected if they wrongly quoted or quoted in compromising forms for financial gains.
Manipulative in Nature
Due to its Unregulated nature, Market Makers may tend to send wrong signals to trade activities,hence increasing more selling pressure in trade which they in turn would absorb due to their high Liquidity.
Short term Liquidity provision
Due to their sparingly presence into the trade to make profits especially to reap off smaller investors, they come in seasonally. Due to the presence of other Liquidity Providers which do not trend and trade at same time, this gap is hardly noticed.
Explain any two indicator that are used in the Market Maker Concept and explore them through charts. ( Screenshot Required)
Market Market Concept and RSI Indicator
This happens to be my preferred choice of indicator which gives me a relatively clear understanding of market trend. It is a momentum indication which reads Price movements in different strong levels at either the Overbought or Oversold points.
The RSI Indicator has its readings captured from 0 - 100 with 0-30 band levels known to be the Oversold levels and 70-100 band levels known to be the Overbought levels.
This different points quickly give us an anticipated market behavior yet to occur. For instance, when price movement is observed within the Overbought levels, that means the given asset is at its peak and there are very likelihood of a pull back or strong resistance given rise to market reversal.
This scenario is also applicable when price movement is captured within the Oversold levels. Price has reach its lowest peak and there are likelihood of a possible market reversal.
Since the market Markers already know this concept and would want to distort this basic trend principles by either increasing buying pressure for Overbought levels to continue the price movements or increase selling pressure to continue further dip. We have to wait for a second valid break with a thick candlestick before taking any trade positions.
Screenshot from Huobi Global site
Market Market Concept and the MA Indicator
The Moving Average Indicator is another fantastic indicator used while taking trade positions. If properly set up, it comes with two trending lines which represents a short and Long term trend. This gives.us a clear scenario where we have the market Support and Resistance which help in anticipating trade positions whenever price movement is observed approaching such levels.
A typical scenario also when these lines are observed to cross each other. This is usually seen when the MA-50 (short term) trend line is noticed crossing the MA-200 (long term) trend line either from below or from above. When it is crossing from above,not is codenamed DEATH CROSS and when it is crossing from below, it is codenamed GOLDEN CROSS.
Just as I've explained, the Golden Cross comes with a bullish and upward movement of Price while the Death Cross comes with a bearish and downward movement of Price. The Market Makers who understands this market concept, is brant on pushing the trend until it crosses . And to the trader who anticipates the trend would quickly take trade positions not knowing it was only a temporary measure before trend collapses and reverses itself. So we have to wait for a valid break before making trade confirmation.
Screenshot from Huobi Global site
Conclusion
Despite the fact that we have some disadvantageous positions observed in the Market Makers concept which heavily comes with it's Unregulated activities and manipulation of Price movements, this concept has continued to provide tremendous Liquidity in the system which adds life in the cryptocurrency space. It has also continued to bring Orderliness and fair evaluation of asset price at all times.
Thank you professor @reddileep for your wonderful lecture this week.
Written by : @chilaw