Introduction
Market making is a fascinating discipline of the financial industry. As a former day trader, I have often been described by brokers and other industry professionals as someone who has a ” knack for market making.” Putting together this article, I endeavor to present you with a deep dive into the world of consistent profitable day trading patterns and specifically on market making.
Market Making A Simple Day Trading Strategy For Consistent Profits Videos
A Basic Definition of Market Making
When individual buyers and sellers go to their respective exchanges, they want to trade instantaneously. They do not sit around and wait. This is where market makers step in and keep the markets efficient by providing liquidity. That liquidity can come in the form of buying from sellers and selling to buyers in wholesale lots or small lots. In return for this service, market makers receive a small percentage of the profit. The bid is essentially where a market maker will buy (liquidity is provided by market makers) and the ask is where they will sell (liquidity is provided again by market makers).
Discovering Market Making
When most people think of day trading or trading in general, they think in terms of breakout trades. That is, waiting for prices to hold above or below a significant price level like 20 period high or low. This can certainly work, but there are more powerful strategies as you will see with market making. The concept itself is rather simple. Market-making traders will watch the market for inefficiencies such as a choke in the bid-ask spread and pounce on those inefficiencies to capture spreads or scalp markets.
Scalping for a Few Ticks
Market makers need to be very quick and versatile. One way to scalp is through bid-ask spreads. Every time a market maker enters the bid, they are buying at the bid, and every time they hit the ask, they are selling. These types of trades are usually profitable for a few ticks. But remember, you should have a target in mind before you even enter the trade.
Trading the Other Side of the Trade
Market makers can also make profits by trading the opposite side of the direction they entered the trade originally. Say you initiated a market making position by buying (bidding) and the price moves against you. You can quickly trade to the opposite side of that position by selling (asking) and then buying back (bidding) once the price moves back in your favor. This strategy can help to capture quick profits.
Trading Large Caps
When it comes to market making, choice of trade can vary. One strategy is to trade large-cap stocks. These issues do not usually experience large swings in price, so there is less risk involved. But the margins are usually much lower than you would see in a penny stock or low float small-cap issued.
Trading Small Caps and Penny Stocks
Trading small-cap or penny stocks can offer market makers larger profit potential. However, these issues often come with increased volatility, so the risk is higher. Market makers still need to be cautious with position size, as a large order could move the price against them.
Knowing When to Pull the Plug
Before you enter any trade, you should be acutely aware of your risk tolerance so that if, and when, you sustain a trade that moves against you it doesn’t knock you out of the market. Every trade has risk. Market makers need to know their limits and avoid trading larger than their tolerance allows.
Conclusion
If you would like to learn more about market making, watch my video on the topic here. For a quick recap, just remember that the market making discipline of trading is a very lucrative one when executed properly.
