Market Making Strategy Example (Staggered Orders)
Update: This strategy is now automated by DEXBot. Please join the DEXBot telegram room or see my other articles for more info.
Here I will show you the basics of how to help provide liquidity to a market and accumulate more coins in the process. I use this strategy on the BitShares DEX. You can change any of the variables here to suit your style.
The point of this strategy is to add numerous orders to the books of any market by covering certain price ranges. We pick a mid point and from there place buy and sell orders at 5% increments until we hit the boundaries of our desired range.
In this example I have been working LTC-bitUSD. I originally started with a midpoint of $165, which was the price at the time. I set buy orders at 5% increments down to $90 and sell orders up to $400. This would be my starting range. As the price moves up filling my sell orders, I follow the price and replace them with lower buy orders. As the price moves down filling my buy orders, I follow the price and replace with higher sell orders. Always taking advantage of the price swings.
I use a spreadsheet to help me keep track of my orders. In this example my midpoint moved up (with the price) as orders were filled. You can see that four sell orders were filled (red) and that I replaced them with four buy orders (green). Keeping the midpoint empty always. As I accumulate coins or fiat, once I have enough to place an extra order I use it to gradually widen my chosen range. It’s up to you what you do with yours!
Above is a screenshot of my exchange page for this example. As you can see my order sizes are always $15 and they are highlighted in blue on the order books. If you look at the “open orders” section you can see my highest buy and my lowest sell. Compare this to the charts above and you will notice the midpoint gap still in place. You can also see “my trades” where orders are getting filled, constantly buying low and selling high.
By keeping the mid-price blank all the time you create a spread of 10% between the buy and sell orders, once the two corresponding orders have been filled you have made your profit. By keeping the order price constant you start to accumulate a balance of extra coins on the way down and extra fiat on the way up.
When creating a basic spreadsheet, pick your mid point. Say $100, set a sell order 5% above ($100x1.05). Then you will follow with another 5% increment ($105x1.05) and so on. Do the same for your buy orders but this time to deduct 5% each time ($100x0.95).
In my opinion the biggest risk for this strategy is not setting the correct boundaries. When I started this I set my highest sell to $400, LTC hit around $350 on the DEX. If it had of kept going to say $500, I would have sold all my Litecoin and possibly have to buy back higher or wait for price to drop back to my last sell, losing out on plenty of action potentially. Remember this is crypto and coins can do a x10 or loose 90% of their value at any moment, work that into your strategy. You don’t have to be constantly checking this strategy, I update my orders twice a day. I recommend starting small whilst you experiment and remember that on the DEX you can use your BTS as collateral to borrow the bitUSD for your buys, so all you need to do is deposit the coins you want to put to work and start cracking the whip!
I hope this guide helps, any questions you can find me in the Market Making room below: