#TradingTypes101 #CEXvsDEX101 #Ordertypes101 #Liquidity101
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Liquidation heatmap: In short, it predicts price levels where large-scale liquidation events may occur. A liquidation event occurs when a trader's position is closed due to price fluctuations, and their margin account balance is insufficient for the open position. To prevent further losses for both traders and exchanges, most exchanges offer a liquidation level, which is the price at which leveraged trades will be forcibly closed.
Traders who can estimate other traders' liquidation levels can gain an advantage in understanding high liquidations in the order book. The Coinglass liquidation heatmap attempts to predict where significant liquidations may occur, helping traders find the best liquidation positions.
The liquidation heatmap calculates liquidation levels based on market data and varying amounts of leverage. The calculated levels are then added to the price on the chart.
As more approximate liquidation levels are added with a specific price, the colors of the heatmap change. The range of colors shifts from purple to yellow, where yellow represents a high number of predicted liquidation levels, allowing traders to identify areas of high liquidation.
The liquidation heatmap predicts where liquidation levels might start but not where they will stop. Therefore, the actual number of liquidations will be lower. When considering size, it should be viewed as a relative figure compared to other levels. Users can filter across multiple major exchanges, trading pairs, and historical liquidation data.
How traders can use it: The liquidation heatmap helps traders identify areas of high liquidity, which can be helpful in various ways.
Magnet zone: It can indicate that the price is likely to move towards a level of potential liquidation density within a specific price range. Some traders use these liquidation levels as additional indicators to determine the possible direction of price movement and for convergence.
Support/Resistance zone: In areas of high liquidation, larger traders or 'whales' can execute trades quickly at favorable prices. Once they enter or exit orders in this liquidity, the price may now reverse.
Moreover, liquidation levels can create significant pressure on the buy or sell sides of the order book, resulting in normal price reversal trends.
Liquidation plays a significant role in the cryptocurrency market as it has a substantial impact on traders' positions. By understanding how to use data from the liquidation heatmap, traders can make informed trading decisions and potentially increase their chances of success.