Market Making Introduction
If anyone wants to buy or sell cryptocurrency then they have to visit the exchanges like Binance or Polonix where buyers and sellers meet. The price they paid depends on supply and demands at that moment this is translated to bid price to buy and ask price to sell. The difference between ask and bid is called the spread. If there are no more parties to buy or sell for that particular coin then it's difficult to trade with that asset and it's called illiquidity. New exchanges or new coins often lack liquidity and have a big spread to guarantee liquidity exchanges ask professionals to provide a bid-ask spread to the market continuously in other words these professionals make markets hence it's called market making.
Market makers usually don’t base their trading on market movements but make a profit on the difference between the ask and bid that is spread. Market makers' profit is spread-transaction fees.
Psychology behind the Successful Market Maker
Market Makers give liquidity to the marketplace. As I draw in the above image Market makers are makes their profit by placing the ask or bid into the marketplace.
If market makers place the ask and once that execute they immediately place at the below the price. And their profit will be that difference between that price which is also called as spread minus transaction fees.
For example, if I sold 1000 tokens at the total price of $1000 and once my sell order executes immediately place the buy order for 1000 tokens at the total price of $995. So in this, I will enjoy the (5$-transaction fees) profit.
If market makers place the bid price in the marketplace once they execute then they immediately place the sell order in the order book at a slightly higher price.
For example, If I bought the 1000 token at the total price of $1000 once my order is executed then immediately place the sell order at the price of $1005. And the difference between buying and sell orders is spread and my profit = spread - transaction fees.
As you saw the above scenario you will come to know that the market maker will help to give the liquidity to the marketplace and their main is making a profit from the spread. I place some trades on the Binance platform just like a market maker and I was able to get a profit of 3 STMX coins.
Benefits of Market Maker Concept
Liquidity To marketplace:-
As we saw earlier Market maker concept gives liquidity to the marketplace by placing the buy and sell limit orders in the market book. And some exchange also gives market makers reward in terms of low trading fees. Because of the orders of market makers, it's easy to trade for that asset as those who want to immediately buy or sell the token can choose the prices from the orders book.
Fast Execution time of trade:-
As we know the market makers provide liquidity to the order book of the market it also results in the execution of the trades will be in less time as because of the market makers frequent orders it will easy to matched and execute orders of another user also.
Helps to increase the price of the token:-
Market makers will help to increase the price of the token by placing the high ask and bid in the order book. Market makers are easily and slowly make the market upside or downside.
Good Price for trade:-
If there are no market makers for the asset then there will be a huge gap between bid and ask and that will lead to volatility in the market and also it's difficult to enter into the market for traders. Because of market makers, there will be less bid and ask gap and it will give a good price to the trader to enter into the particular assets and also they will easily book their profits when their targets are reached.
Disadvantages of Market Maker Concept
Manipulation in the price of asset
If the market makers can decide to make one coin price to a very low or very high level then they can make it happen by giving the artificial liquidity to the order book of the asset.
No central authority
As there is no central body to conduct these artificial trades and at any time they will withdraw their money from the order book and that will impact the huge price difference between ask and bid price.
Not beneficial for the small scale traders
As this type of trading will give profit of small portion of coin and after transaction fees deduction if we did with a small capital then it will hardly give small returns. So this type of concept is beneficial with huge capital.
Technical indicators that are used in the Market Maker Concept
As per my experience in crypto trading, I mostly used two indicators for the trading, and those two we also used in the market maker concept.
1) RSI
As we know market-making concept mostly depends on buying at low and sell at high or sell it on high and buy it on low than RSI indicator will help us the most. As we did trading with RSI we all know there is 2 extreme condition one is when RSI indicator is below 30 it will indicate us that now the trend will change and this is the best time to buy that asset and when we saw the RSI above 60 then it will specifically treat as it will change is a trend from uptrend to downtrend. So with the help of this, we will constantly place the buy and sell limit orders which helps to give liquidity to the marketplace.
2) Moving Average
Moving average is show us one trend line by calculating the previous day's price data. I prefer to work with two moving averages one is 7 days and 2nd is 20 days moving average when you saw the price is below the moving average is good to sell the asset order and when you saw the bullish candle above the moving average trendline then it is good to place buy order.
Conclusion
Market makers are a sign of the health marketplace as it helps to book profit or make an entry on the particular asset at a good price. As we saw moving averages and RSI indicator is helping us with the market-making concept as it shows us trend reversal and current trend it will help us to place some trade like market makers.