A liquidation map, also known as a "liq map," provides a visual chart of liquidations or liquidation risk in the futures cryptocurrency trading market. It displays liquidations that are predicted based on previous price trends.
When traders engage in trading on unregulated cryptocurrency derivative exchanges, they are constantly exposed to additional risks, namely liquidation risks. When the liquidation price of a trader's position is triggered, their position is forcibly closed by the exchange's risk engine.
The impact on the market is relatively small when a small number of positions are liquidated. However, if thousands of positions with similar liquidation prices are liquidated, the effect on the market price can be significant. Moreover, market buy and sell orders triggered by liquidations can cause rapid price movements, leading to a "cascading effect" where more nearby positions get liquidated. This phenomenon creates substantial price fluctuations (which institutional players often take advantage of as an entry strategy since the rapid injection of liquidity within a short period can meet the demand for institutional large orders).
Different combinations of leverage and time frames depict various clusters of liquidations. The denser and higher the liquidation clusters, the greater their impact on price behavior when reached.
By utilizing a liquidation map, you can:
- Engage in breakout trading
- Execute profitable scalp trades
- Place stop-loss orders precisely to prevent stop hunting
- Capture profits in high liquidity areas
- Optimize the execution of large positions by finding liquidity and avoiding unnecessary slippage
- Understand when prices are likely to experience rapid fluctuations and retracements
What do the two axes represent?
The X-axis represents the mark price, while the Y-axis represents the relative intensity of liquidation.
The liquidation chart does not provide an exact representation of the number of pending liquidated contracts or their precise value. Instead, the bars on the liquidation chart represent the relative importance of each liquidation cluster compared to adjacent clusters, i.e., their intensity.
Therefore, the liquidation chart illustrates the extent to which a particular position will be affected when the price reaches a certain level. Higher "liquidation bars" indicate a stronger reaction due to a surge in liquidity.
Note: The different colors are solely meant to distinguish between different liquidation clusters and do not provide additional information.
Liquidation maps exist in various forms, each corresponding to different combinations of time frames and leverage ratios. Different combinations of leverage ratios and time frames generate distinct liquidation clusters. The denser and higher the liquidation clusters, the greater their impact on price behavior when reached.
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