How To Use Liquidations

A birds eye view of the market

Being able to see other traders' liquidation levels gives the user a “Bird’s Eye” view of the market. These levels are aggregated across several high-volume exchanges to show the average liquidation level of those leverage positions for that Crypto trading pair. 

Another example of using liquidations is looking at “Liquidity Zones”. Liquidity Zones are areas with several liquidations stacked on top of each other. The more liquidations build up in the zone the higher the probability of a volatile move that results in the breaking of these zones.

Targeting 50x & 100x traders

One of the most effective methods for using the Liquidations Indicator is to focus on the 100x and 50x liquidations. These have a very high probability of being liquidated within an intraday period of trade and are suitable for low timeframe trading. Combining 100x and 50x liquidations with other Key Levels, users can see the potential targets for market makers to push the price to grab that liquidity from those traders. These can also be suitable reversal points or profit targets if the user is already in a trade.

Note how the majority of the time, price will ping pong between the 50x and 100x longs / shorts, the majority of the time the move ends liquidating the 20-25x positions, then reverses and goes the opposite way. Then the market maker rinses and repeats the other direction.

Liquidity Zones

Another example of using liquidations is looking at “Liquidity Zones”. Liquidity Zones are areas with several liquidations stacked on top of each other. The more liquidations build up in the zone the higher the probability of a volatile move that results in the breaking of these zones.

An example of how the breaking of these Liquidity Zones works is if a trader takes a Long position of $100 at 100x Leverage resulting in the actual position size of $10,000. This is a very high leverage position that also incurs very high risk. Say price reverses and triggers this trader's liquidation position, this causes the exchange/broker that is being used to “market exit” that position. The exchange will always protect its assets as it is in a sense “loaning” that trader $9,900 to take the position. The only way to exit a Long position is to Sell which has the same effect as taking a short position in the equal amount of the original long position, which in this case is $10,000. This means that as more liquidations stack in a “Liquidity Zone” it increases the probability of high volatility moving into that zone as many positions are liquidated. This causes a market phenomenon we refer to as “Cascading Liquidations” where many positions are liquidated forcing price into other liquidations that also in turn become liquidated. This is the catalyst for every extreme Pump or Dump that is experienced within the Crypto market and even any other margin-traded market.

Pro Tip

The 1d, 4hr & 1hr timeframes are most effective