Hi Professor @reddileep I am @ononiwujoel one of your students in Crypto Academy and a member of the steemit platform and this is my homework submission post from your lecture Indepth Study of Market Maker Concept
1- Define the concept of Market Making in your own words.
Market as a word generally has to do with buying and selling, it can be a place where trading activities take place and it can also be the parties involved in the trade. So for a market to be functional and established there must be continual trading activities of buying and selling and this is where the concept of Market Making comes into the picture.
Market Making can be defined as the process by which traders stimulate or influence market prices through their trading activities of buying and selling positions.
Although theoretically every active participant in the market is part of the market making concept the amount of assets is what majorly distinguish top Market Makers from other small traders. So Market Making can be said to be mainly instigated by accounts which huge amounts of asset, these are usually firms, institutions and Whales in the market who trade in massive volumes thereby providing the needed liquidity to the market and also surging market volume.
These Market Makers create buying and selling orders with huge amount of money and when these orders are executed they influence the general bidding and asking prices of the market because smaller traders will have no choice than to follow their lead due to the huge trade volume of their orders and so the trade usually ends up in the favor of these Market Makers.
Due to fact that the market liquidity creates a balance between supply and demand ratio and its largely in the control of Market Makers who are usually accounts with large sums there is always the tendency of Market Makers manipulating the bidding and asking prices in the market to their own advantage and to the detriment of other smaller accounts who have no choice than to follow the direction of the Market Makers or face huge losses.
There are also several Automated Market Makers (AMM) in the crypto space today that helps in providing liquidity to the market. These allow smaller traders to stake their assets and hence also be liquidity providers in their little capacities and hence reduce the manipulating influence of Whales and private Market Makers in the Market.
2- Explain the psychology behind Market Maker. (Screenshot Required)
Like discussed in the previous question, the Market Makers are high value accounts that trade with huge amounts and thereby provide liquidity to the market through their trading activities. But there is more to being a Market Maker than just trading with huge sums. The Market Makers uses the advantage of their large trade volumes to create new bidding and asking prices which can either be higher than current prices or lower so as to make their own profits from the trade. This is the technique through which Market Makers influence the market prices.
From the screenshot above we can see that YGG coin is currently trading at $6.6838, the highest bid price is $6.6767 while the lowest ask price is $6.6838. So when Market Makers wants to participate in this market they won't just use the current price, since they're using huge sums and at such having higher risks they have to explore a way to make profits from the trade so a whale will normally place a sell order below the current prices to maybe $6.6600 with a sell order worth maybe $1,000, 000. This huge amount will reflect on the price movement signals and indicate a downtrend which will then make other traders to sell their positions at this price and even lower than it to fill up the order but after this trade is executed the same whale will place maybe $1,000,000 buy order at maybe $6.6900 and the same process repeats and the whale makes his profits.
It is a continuous reoccurring pattern in the crypto market and largely contributes to the regular changes of price movement in the market that is why smaller traders are advised to follow the moves of these Market Makers for better chances of making profits.
3- Explain the benefits of Market Maker Concept?
Market Makers are quite indispensable to a very large extent and help in maintaining the smooth flow of the market. I'll be listing some basic benefits of Market Makers below
Market Liquidity
Liquidity is one of the basic requirements for a functional market and if there is no liquidity the market is likely fail. This factor is so important that there are now Automated Market Makers in several crypto trade platforms to help maintain liquidity. Market Makers provide liquidity to the market through their large buying and selling orders and such keeps the market functional and valuable.
Trade Opportunities
Market Makers usually influence prices in other to make profits from the change in direction of price movement and thus also provide opportunities for observant smaller traders to make profits from the price movements as well.
Boost Market Psychology
Market Makers also help in creating a surge in interest of people to the market through their regular artificially stimulated price uptrends and downtrends because several people also want to buy the dips and sell in the Bullish, so they make the market attractive and hence increases the participation ratio.
Increase in Asset Prices
Several crypto like AXS and ADA has seen massive growth in prices and volumes due to the activities of Whales and several other Market Makers. Many times they contribute to the growth of asset prices due to their increases in bidding prices over a period of time.
4- Explain the disadvantages of Market Maker Concept?
In as much as Market Makers brings many advantages to the market, they also have their bad side effects and cons to the market. I'll be listing some basic cons below
Price Manipulation to favour whales
This is the most popular sentiment against Market Makers which are mostly Whales in the crypto space because they're always using their voluminous trade activities to manipulate prices to their advantage and hence they make profits from smaller traders who end up in loses.
Price Volatility
The entire crypto space has been continuously plagued with high volatility on prices, sometimes prices even change multiple times in the space of an hour and the Market Makers are contributors to this uncertain volatility because of their trade patterns of causing rises and dips to make profits.
Value Unstability
Whales who engage in Market Making to provide liquidity contribute to the Unstability of asset values because at one point they are worth a price and at another time they're either higher or lower making it almost impossible to ascertain the actual value of assets over a period of time.
5- Explain any two indicators that are used in the Market Maker Concept and explore them through charts. (Screenshot Required)
Since we already know what the Market Maker Concept is all about and we also know that trading indicators are used for technical analysis and to observe price movement of the market to be able to make profitable decisions in trading, we can now use these indicators to observe how Market Makers engage the market to their advantage using the Moving Averages and Random Index indicators respectively.
Moving Averages (MA)
This is arguably to most popular indicator for technical analysis in the crypto space and it has proven over time and again to be very efficient and to some extent reliable for understanding the market psychology and price forecast.
The major features of this indicator are deathcross and golden cross, the former is a strong bullish signal which in most cases turns out valid while the later is an opposite as it is a strong bearish signal which also is valid usually. The moving average indicator uses lines that measure the average of prices to represent price movement and is very useful for technical analysis.
Market Makers also use this indicator knowing fully well that other smaller traders use it as well for making trade decisions and price forecast, so the market makers simply instigate artificial deathcross or goldencross through their voluminous trade orders and make other traders fall for it while they make their profits at the end of the day.
From the chart above we can see there are at least two marked deathcross and another in between, the one in between is a good example of Market Makers manipulating the market to their advantage because it brought a suddenly huge uptrend which didn't even last more than a day before a strong bearish, this shows the presence of Market Makers who are successfully manipulating the market to their advantage
Random Index (KDJ)
Random Index which is usually called the KDJ indicator is a very easy to use and similar to the RSI indicator except for the J-line which makes it more precise and enhanced. The KDJ indicator consists of three lines called the K-line, D-line and J-line which analyzes the price movement of the market.
The KDJ indicator is mainly used to show when prices are overbought or oversold, it runs on a scale that is divided by two horizontal lines which are usually on the 70 and 30 points respectively. Whenever prices cross above the 70 mark on the KDJ scale then the asset is overbought and there is likely to be a bearish trend soon but whenever the price cross below the 30 mark on the KDJ scale then it means the asset is oversold and there is likely to be a bullish trend soon.
The KDJ indicator also depicts deathcross and golden Cross so this is a very great strategy for market analysis and price prediction
[source]
From the chart above we can see the several artificial deathcross instigated by Market Makers and Whales because these trends stay for a very short period of time before swinging to the opposite direction all thanks to Whales and Market Makers manipulating the market to their advantage.
Conclusion
Market Maker Concept is an indispensable aspect of trading especially in Crypto because without Market Makers there will be no liquidity providers and without liquidity the market is as good as disfunctional because there will be no trades so market makers cannot be overemphasised. In as much as they're very useful to the crypto market they also have their negative consequences to the market, most Market Makers are Whales in the market who are never tired of exploiting other smaller traders in the market to their advantage and there are other disadvantages too but in the long run Market Makers are very useful to the market.
There are also Automated Market Maker (AMM) like Serum, Orca and others in different platforms to help with liquidity providing and also give chance to other smaller traders to be liquidity providers with the little they have by staking their LPs and vests in the is AMMs.
It was a great lecture and I learnt a lot
Cc: Professor @reddileep