Liquidation data can be highly informative when combined with metrics like volume, open interest, or funding rate. These three indicators help provide a clearer picture of market behavior and trader sentiment. Here’s how each works with liquidation data:
1. Volume and Liquidation:
- Volume represents the total number of contracts or shares traded during a specific period.
- Liquidations combined with high volume can signal a significant market move, as many traders are being forced out of their positions. For example, a spike in long liquidations combined with high selling volume often indicates a strong downward price movement, and vice versa for short liquidations.
- Key Insight: When liquidations happen in high-volume conditions, it suggests strong conviction in the direction of the move.
2. Open Interest and Liquidation:
- Open Interest (OI) represents the total number of outstanding contracts (positions) in a market.
- Decreases in OI after large liquidations suggest positions are being closed, potentially marking the end of a strong move (e.g., a final shakeout).
- Increases in OI with liquidations may indicate that new positions are being opened, often by more aggressive participants looking to capitalize on the forced liquidations of others.
- Key Insight: A combination of high liquidations and falling OI could signal the exhaustion of a trend.
3. Funding Rate and Liquidation:
- Funding Rate incentivizes traders to take long or short positions based on market imbalance.
- Liquidations in the context of extreme funding rates are often a precursor to reversals. For example, if funding rates are extremely positive (indicating longs are paying shorts), and then a large number of long liquidations occur, it might signal that overly leveraged longs are being forced to exit, potentially triggering a downward move.
- Key Insight: Funding rates help identify the positioning of the majority of traders. If liquidations occur with extremely skewed funding rates, it often means the market was over-leveraged in one direction, which could result in a price correction.
Summary of How They Work Together:
- Volume + Liquidations: High liquidations with high volume = strong price moves with conviction.
- Open Interest + Liquidations: High liquidations with falling OI = potential trend exhaustion; with rising OI = fresh participants entering.
- Funding Rate + Liquidations: High liquidations with extreme funding rates = potential market reversal due to overly leveraged positions being wiped out.
Each of these indicators adds valuable context to liquidation data, and using them together can help you make more informed trading decisions.
