Market makers
Market makers are those firms, brokerage houses, or in some cases individuals that ensure the liquidity of an asset on an exchange and making their own gain from the difference in the bidding and asking price. These market makers buy and sell assets to investors and make sure that the market is liquid, in the sense that the seller does not have to go and find the buyer, but the market makers take charge of these issues and ensure that the exchange is very fluid.
Why are market makers very important? Market makers are very important because they ensure that investments are validated and approved in time and help to bridge the gap between the sellers and the buyers. Once an investor, say peter, lodges a bid for a certain volume of assets, the market makers sell off some of their own assets and sell them to peter, that is what the market makers do basically. So a market maker can bid for a token for $2 and ask for $2.01; what it means is that the market maker buys the token for $2 and sells it for $2.01, if that’s the case then the difference in the bid-ask price will be the profit of the market maker.
Market maker psychology
it is important that a trader gets the whole concept of the market maker correctly because the cryptocurrency market doesn’t just fluctuate, but fluctuate according to some vices that are regulated by demand and supply, and this demand and supply are being managed by the market makers and the whales. It is important that you do your research and uses specific indicators that will help in averting losses due to these market influencers.
The market makers make sure that the volume of tokens available is large enough for transactions to be carried out easily without friction. If market makers set the bid and ask price at a level that is not far apart, say $2 and $3 respectively, other investors tend to set their within that range and that can help in raising the price of an asset. Sometimes the market makers like whales can sell a large volume of their positions and this scares little investors into selling their coins and consequently, the market makers; who are also whales and has a Large wallet, buy the tokens at a very low biding price.
market maker benefits
- The market makers help in making the financial flow of exchange to be fluid and liquid thereby helping the investors to carry out their transactions with ease.
- The market makers can help in stabilizing a particular market and help in building the price of a token by setting huge bids and ask prices
- Market makers generally help in stabilizing the price of a token by setting bids and ask prices that are not far apart; this means that the market makers ensure the amount the token is being sold is not too different from the real actual price.
- A good analysis ensures a short quick profit for traders; especially day traders, and it ensures an efficient entry and exit strategy.
Demerits of market makers
- market makers because of the large resource they control are able to influence the market which is not good for small investors and even goes against the very essence of blockchain technology, which is decentralization.
- Mishaps on the part of the market makers can lead to the token price falling drastically, that is when the asking price is very high, investors tend to lose confidence in the token and the demand for it falls and so does the price.
Some indicators that are relevant to market-making
There are some indicators that can be used in analyzing a market to take advantage of the market maker and whale action on an exchange. Below are some of them:
1. On-Balance volume: This indicator is very vital in knowing the activities of whales on the exchange, the signals of this indicator fluctuates due to sharp variations in the market volume and one unique characteristic is that it is a leading indicator; that means it has predictive importance and reveals a trend reversal before it occurs. A thorough analysis using this indicator is demonstrated below.
HOW MARKET MAKERS USE THE INDICATOR
Market makers can use this indicator to prompt little traders into selling their positions and further stamp their position as the liquidity providers and also buy the coins off small traders. Since the market makers hold a very good share of coins, they can sell a huge portion and instigate a sharp signal from the OBV, thereby tricking day traders into selling their coins due to false and manipulated signals.
2. Moving average indicator: This is a lagging indicator that takes into account past trade data to try to tell the strength of a certain trend and this is very helpful in allowing a trader to know how strong the trend is in order not to be deceived by the market makers or whales. the longer the time frame a moving average indicator takes into consideration, the more resistant it is to recent sharp fluctuations, and the degree of lag increases. Below is an analysis of a coin pair demonstrating the moving average indicator.
HOW MARKET MAKERS USE THE INDICATOR
The market makers, because of their whale status on the exchange can cause a false sell signal, like the indicator signaling a golden cross but then a trend reversal doesn’t follow but little investors sell off their coins and their wallets of the market makers keep on increasing.
Conclusion
Market makers are very important in ensuring that the cryptocurrency market is very fluid and liquid and also helps in the development of the coin price and attracts big investors to the project but a mishap can be very deadly and detrimental; most especially to small traders, they can manipulate the market because of their huge resources given that they are funded by big investment firms .there is every need for laws to be put into place to regulate the overall activities of the market makers to ensure that there is transparency and accountability.
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