1- Define the concept of Market Making in your own words.
A market maker can be said to be an individual or a firm who actively creates the two sides of a market in a given asset. These two sides created by the market maker are the Ask and bid Prices.
The process of achiving this activity is known as market making. Usually, the making makers make the market in order to gain from the Bid-Ask-Spread difference. In the process, they create liquidity and depth for the market of the given asset.
Market Makers are generally known as individuals who create ask and bid prices of a given asset. This created prices are to be accepted and used by the price takers. The price takers refer to those who accept the various prices that has been established by the market makers.
2- Explain the psychology behind Market Maker. (Screenshot Required)
One thing to note is that for every successful liquidity filled market, there are buyers and sellers. That is to say that there must be market makers and price takers. Without each of the parties, then liquidity will be difficult in the assets market. The idea of market making is to buy at a price less than the lowest ask and to sell at a price higher than the highest bid.
The market makers usually use the limit orders and various other favourable kind of orders to achieve market making. The market psychology is preyed upon by these market makers hence they achieve what they want( could be to facilitate a bullish or bearish trend) in the asset market. Usually, when a market price is set, every other ask and bid order that comes rotates around the market price. With the knowledge of this, the market makers input buy and sell orders with a huge volume of the particular asset. Having done this, it will then cause every other trader coming hence forth to try to set their market orders around whatever new price the market maker has quoted.
The market makers usually have a choice. They utilize the various limit orders to ensure that the will only buy or sell at their desired price.
3- Explain the benefits of Market Maker Concept?
1) provides Liquidity: The main aftermath of what ever market makers do us that they provide sufficient liquidity to the asset whose price they make and also on the exchange. Since liquidity is known as the rate at which a coin could be easily bought or sold, the the continuous activity of the market makers ensure that there is sufficient liquidity in that asset.
2) Increase in Asset Use Case: The continuous quoting of the bid and ask prices by the market makers help to entice traders to the coin. Hence, traders can even select the coin as their trading coin since it has sufficient liquidity which they need.
3) Availability: Since there exist great liquidity which has been initiated by the market makers, hence the coin becomes readily available at any given time.
4- Explain the disadvantages of Market Maker Concept?
1). The market makers can keep quoting the various market prices for a given asset but what will then happen to the liquidity which they create if they are to pull thier funds? So this makes the market more risky and this is what brings about the continuous volatilityof the crypto market.
2). Since the Market makers create the market prices, they could then use this opportunity and prey upon the various market psychology to manipulate the market as they wish.
3). Since the market makers are mostly unchecked, if they decide to embark on greedy schemes, then the small traders are the ones who will lose value for their asset.
5- Explain any two indicators that are used in the Market Maker Concept and explore them through charts. (Screenshot Required)
The market makers take advantage of certain indicators to quote the market prices. This could be because of the popular use if the indicator or because if it's vitality in the crypto space. Some indicators which are used by the the market makers include
- Moving Averages (MA)
- Bollinger Bands
- Moving Average convergence divergence (MACD)
- Stochastic Oscillator
- Exponential Moving Average (EMA)
- Relative Strength Index (RSI)
Below is an explanation of how the MACD and RSI is exploited by market makers
MACD
The MACD is a vital tool which is used by traders for the identification of trend direction, market strength and reverse strategy. Hence, MACD has got 3 lines. Each one depicts the signal line, the MACD line and histogram.
The histogram depicts an untrue downtrend in the market which could prompt traders to exit their positions. This window gives the market makers space to bid while there is a massive sell off. Afterwards, there come an uptrend.
RSI
RSI is a very vital and widely used indicator. The RSI refers to an Oscillator that is made up of many many swinging lines that depict the various fluctuation of the market from top to bottom. The RSI has a scale of 0 to 100 and has a lengthe of 14. From the scale range of 70-100 depicts the overbought region while the scale range below 30 depicts the oversold region. In the chart below, the RSI has just crossed the 70 range hence we have an overbought region. The market maker then gives up his asset and then quotes his price and takes profits.
Conclusion
The market makers are very important parts of the crypto world. This is because of their constant effort in an attempt to provide liquidity to various Cryptocurrencies. Hence, the need for market makers cannot be overlooked.
The market makers donnot work alone else their activities will get boring and then they will quit. Hence, they also require the participation of the price takers to facilitate the process better. So, these two parties are needed even though the market makers has the most job to do.
It is also important that before investing, one should make thorough analysis for themselves and also, invest what you can lose.
Regards to professor @reddileep
Hello @gabikay Thank you for participating in Steemit Crypto Academy season 4 week 6.
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