Market-making with the Grand Exchange Written by Anim7, geared towards F2P What this guide is NOT: It does not involve taking directional bets It does not involve clan manipulating It does not involve trading illiquid items or junk It is a bold statement to say that you will make money guaranteed. However, the statement is realistic. If you follow this guide, you WILL make money in the long run. I personally have made a 50% return on a 8 million starting cash pile...all within one week. And no, I didn't get lucky or anything. I simply followed my own rules and most importantly, I wasn't greedy. I am not claiming that this is faster than other ways to make money. It is simply an alternative for those who don't have enough time to play. Table of Contents Intro to Flipping Requirements The Bid-Ask Spread Secondary Account & Item Selection Deriving the Spread Buying Low Selling High Spread fluctuations Macroeconomic Events Tips for the Beginning Flipper (One of the easiest moneymakers) [hide=1. Introduction] This guide assumes that you know about the GE, how it works, the limits, everything else that is basic and can be found in other guides. You will essentially be "flipping", which is what this is. I intend to formalize that process. The topics aren't very advanced. It tries to mirror real life finance where firms try to make markets by quoting a bid and ask price for securities. However, this is a game and the market participants are mostly teenagers.... At its core, this guide will teach you how to make safe and steady returns over time. It is not designed to be a one trick pony. At every point in time, I tend to stress the principles of risk management. Don't ever try to be greedy! I personally have made a 50% return on 8M starting cash pile over the last week. None of it is from directional bets. The majority of the items I flipped, tanked over 5%, yet I made money on it. Why? Because it is relatively riskless if you follow my principles. [/hide] [hide=2. Requirements] You are a trader. The minimum recommended capital is 5 Million coins. You also need another RS account with 200-300k in capital. You won't be multi-logging, so this is perfectly legal. [/hide] [hide=3. The Bid-Ask Spread] This is most fundamental principle that you need to wrap your head around. I will be referring to the "Spread" quite a bit, so learn it. The GE, is a market. And like all markets, there are market participants. Think of the market as a set of "bid" prices and "ask" prices. Here is a snapshot of a market for Item X which has a mid price of 100, max of 105, and min of 95. Note that this is very dynamic and changes instantly. 95---300,000,000 96---50,000 97---80,000 98---170,000 ==================== ==================== We call this region in between the bid-ask spread ==================== 103---420,000 104---1,000 105---100,000,000 As you can see, the highest price that someone is willing to buy this item is at 98(bid) and the lowest price someone is selling is at 103(ask). The spread is 103-98 = 5 You might then question...How do to trades get executed? Answer is, people either give in to the other side, or new market participants want to instant-sell or instant-buy. So for example, lets say I really wanted this Item X. I put in a buy offer for 105. My trade is executed immediately at 103 and that 420,000 becomes 419,000. Another scenario. I am the guy who wants to buy 170,000 at 98. I am the best bidder in the market. However, no market participants are entering orders at my price. I cancel my order and put 170,000 @ 105. My trade is executed at 103 instantly. The spread becomes 6, because now the highest bidder is @ 97. Important note about spreads. They can shrink, they can widen, they can be nonexistent (dump or buyout), they can shift around. This guide will show you how to make a profit off these spreads. [/hide] [hide=4.Secondary account & Item Selection] The GE is not a true exchange in that the bid and ask price is not displayed. You have to derive it empirically by placing an order. Furthermore, if you place a buy order, you can't place a sell order on that item for 4 hours. So this is why we need a secondary account. If you already have one, great! If not, I suggest making one. These secondary accts are useful is figuring out the spreads to some degree of precision. Your secondary account needs 200-300k of starting capital. This takes approximately a day doing some w16 running. The items that you will be making markets for: Iron, Coal, Mithril, Addy, Gold, Silver (ores and bars) Maples and Yews Waters, Earths, Chaos, Death, Natures, Laws Addy arrows Big Bones Lobs, Swordies (Raw and cooked) It is no coicidence that these items are heavily traded and they have huge supply and demand. In actuality, you can use most of the items in the GE page under "Most Traded Items" On your secondary account, buy all of these items and have around 15-50 of each one. [/hide] [hide=5. Deriving a spread] You have a finite list of items that you will be trading in. Randomly choose an item and look at the graph on the GE. This is for your good. You want your item be trading within a stable range. If it has gone down for a long time, be wary. If it has gone up for a long time, be wary. I will discuss strategies for these in a later section. This is much more advanced. Assuming you have found a stable item from our list. You need to figure out the bid price and ask price. For our sake, I will call the primary acct (A) and secondary account (B). On A, buy 1 of the item at max. Note the price. On B, sell 1 of the item at min. Note the price. Figure out the percentage profit. If it is under 2%, forget it. If it is over 2%, it is a potential target. DO NOT BLINDLY TAKE THIS NUMBER AS THE SPREAD. You need to test the waters again for around 2-3 minutes and repeat. To test the accuracy of your observation, put in a buy offer on A, at 0.5% below the bid. Wait 3 minutes. If offer is fulfilled, then this is your adjusted bid price. You don't have to find an adjusted ask price, since you cant sell for 4 hours and by then, the markets could have shifted. Rule of Thumb: The higher the liquidity of an item, the easier it is to find the spread. ie, maples and runes are very easy to test. But less liquid items like addy ores or mith bars are harder to test. Therefore, don't attempt these until you are experienced. [/hide] [hide=6. Buying Low] The all important question: How do I get the best deal on an item? If you are buying the item and it is trickling in every 30 seconds or so, then you are getting a good deal. If it fulfills relatively quickly, then there is selling pressure. You want your offer to fulfill within 15 minutes. If left for too long, you need to readjust the bid and ask prices. Also, try not to surpass the GE limits when buying. It leads to greater uncertainty, higher risk, and possible downside potential. You aren't the only one doing this kind of merchanting. There are thousands of people just like you, who are playing the markets, so be smart when trading. Rule of Thumb: Don't try to undercut someone else. If the bid price is 100 and the ask is 110, then you should buy at 100. If you start buying at 101, then you run the risk of being cutting the spread down. The last thing you want is to start a bidding war. Speaking of bidding wars, when your offer no longer fulfills, you should retest the bid-ask spread. If the bid has gone up AND the ask is the same, then you are being undercut. You should move on to the next item. [/hide] [hide=7. Selling High] After the 4 hours are up, you should try to sell. Remember, when selling off, you need find the spread once more. This time, sell one item on account A at min and buy that item on account B at max. Test the waters a couple times to ensure accuracy. Hopefully the profit you gain is around 2%, but if it is a little less than that, you should try to sell anyways. Remember to sell at the ask price, and DO NOT undercut. However, if the profit is less than 1%, you have to assess the situation more carefully. This is explained in the next section. [/hide] [hide=8. Spread Fluctuations] A very common scenario is that the spread has changed dramatically in the 4 hours. Do not panic if this happens. If you find that the ask price is the same as the price you bought at, then you should wait. What if the ask price is higher? Then you should sell now. What if there is no ask price (lots of demand, people buying at max)? Then you should wait for a GE update. What if the item is tanking? Sell-off at min. [/hide] [hide=9. Macroeconomic Events] Sometimes, the item that you pick will be affected by news from Jagex, new content, etc. For example, with pvp updates, if you are holding on to food, expect it to rise considerably. Therefore, do not sell-off. Wait for GE updates and then time your sale. Sometimes, you will have updates that tank your item. This is unfortunate, and you should sell-off at min. Remember: As a market-maker, you are not taking directional bets at all. You are simply playing the spread. When you sell-off at min, your losses are cut short and you can make the money back from other items that you will be flipping. Do not get attached to an item. They are just commodities, and you are just an agent. [/hide] [hide=10. Tips for the Beginners] Buy water runes at 33 or 34. Sell for 35. Buy chaos runes at 49, sell for 51. Lean towards items that have bid prices less than mid. I have noticed a degree of mean reversion in most liquid items, so that means that there is a higher chance of you profiting from an upside than suffering a downside. Do not buy tanking items, or items that are rising. Volatility is your greatest enemy. [/hide] Thank you all for reading this guide. Please feel free to comment and share your experiences.
