The Liquidation Heatmap is a tool used in cryptocurrency markets (or any financial market) to analyze price levels that may experience liquidation of trading positions. Liquidations occur when the price of the financial instrument reaches a level that forces the trader to settle their debt (either due to margin calls or because the trade has become unprofitable).
How to read the liquidation heatmap:
1. Colors:
Hot colors like red or orange indicate areas with many trading positions that will be liquidated when these prices are reached.
Cool colors like blue or green signify areas of low liquidation or pressure.
2. Price levels:
The map displays price levels where liquidation is likely. If the price is near these levels, significant liquidations are likely to occur.
3. Volume and clusters:
Sections that contain many open positions or high leverage represent a greater risk of liquidation. The more open positions there are in a certain price range, the higher the likelihood of liquidation in that area.
By using this tool, traders can identify price levels that may experience significant movements due to liquidations, helping them make informed trading decisions.