Market makers have absolute power on instrument

Understanding Behaviours of Market Makers

By Ali_St | Paradoxal_Investment | 19 Jun 2022

There are 2 groups in exchange markets whether they are traditional (like stocks, commodities, currencies etc.) or non-traditional! (crypto, NFTs etc.)

  • Investors
  • Market Makers

Us, investors which constitute almost %99.5 of a market, aim to buy an instrument from a relatively cheap point and sell it from higher point. Our job is relatively easy. We invest our money to an instrument from one or several entry points and then waiting for a rise in prices.

But when it comes to market makers it's not that easy! They are the ones who manage the instrument! They constitute %0.5 of market but they have absolute power on it. They decide on direction of instrument and when they have decision they act accordingly in the market.

Let's say they decide that instrument will go up, they buy it in every point unlike us. They are the main power behind uptrend!

Look at below chart of an unnamed instrument! After a long, sickening horizontal trend which lasts for years, he decided that he collected enough from investors who can't bear waiting in horizontal trend for a cheap price and started the uptrend:

Unnamed chart

From 1 to 2 market maker buys from every price that investors ready to sell. During this journey, of course there are ups and downs, in some points he looks like he started to sell but this is a trap to shake investors who try to hold the instrument, in bigger picture he is in the buyer side of the market.

And when he reaches the top (He knows this point because he has absolute power on market) he switches the roles and starts to sell!

At this point we have to find until which point he can continue on selling?

ANSWER is average cost! Let's say his average buying cost is 1.5 for this trend from 1 to 2! He can sell until price drops to 1.5! Every lot he sold will be profitable for him! 

As you can see he sells it until prices go to his average buying cost! After that he stops selling and switches role again, becoming a buyer to create an opportunity to sell in higher prices to the newcomers who think price dropped enough and trend must be reversed! And this continues until he sets up a new game! 

So this is the main difference between behaviours of investors and market makers! We have some entry and exit points but they  make their plans on average buying and selling costs and fluctuates prices accordingly! They are always in the game, buying and selling!

Key to our success is determining market makers' buying and selling average costs accurately!

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38 years old, economist, trading-addict


Sharing experience and thoughts on markets and trading after 20 years in traditional stock markets.

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