How to Use Liquidation Levels to Your Benefit and earn $100 Easily every day
What Are Liquidation Levels in Trading?
In futures trading, liquidation levels are specific price points where your position is automatically closed by the exchange to prevent further losses. This occurs when your margin balance (the collateral you provide) drops below the required maintenance margin due to unfavorable price movements.
How Liquidation Works
Initial Margin: This is the margin you need to open a leveraged position. For instance, with 10x leverage, if you open a $100 trade, you only need $10 as the initial margin.
Maintenance Margin: This is the minimum margin required to keep the position open. If your margin falls below this due to price movement, your position will be liquidated.
Liquidation Price: The price at which your position will be liquidated. This level depends on:
The leverage used.
Entry price of your trade.
Maintenance margin requirement set by the exchange.
Example of Liquidation
Assume you go long (buy) on Bitcoin at $30,000 using 10x leverage with $100:
You control a $1,000 position with $100 initial margin.
If Bitcoin drops to around $27,500, your margin balance may fall below the maintenance margin, and the exchange will liquidate your position to protect itself from further losses.
How to Use Liquidation Levels to Your Benefit
Understanding liquidation levels is crucial to avoid unnecessary losses and even take advantage of others' liquidation points. Here's how:
1. Avoid Liquidation with Proper Risk Management
Use Stop Loss Orders:
Always set a stop-loss well before the liquidation level to minimize losses. This allows you to exit the trade early rather than risk liquidation and potentially losing all your margin.
Lower Leverage:
The higher the leverage, the closer the liquidation level is to your entry price. Lower leverage gives more breathing room and reduces the likelihood of liquidation.
Add Margin When Necessary:
If your trade approaches the liquidation level but you believe the market will reverse, you can add more margin to prevent liquidation. This increases your position’s sustainability.
2. Identify and Trade Around Other Traders' Liquidation Levels
Liquidation Cascades:
When large numbers of traders have their stop-losses or liquidation levels near the same price (e.g., a support or resistance level), a cascade effect can occur. This can trigger rapid price moves as positions are liquidated.
Benefit from the Liquidation Zones:
Short Squeeze: If a market is heavily short and the price rises quickly, liquidations of short positions can fuel further upward movement.
Long Squeeze: Conversely, if the market is long-heavy and price drops, liquidations of long positions can accelerate the downward trend.
How to Use This:
Identify key support and resistance levels where many traders may have stop-losses or liquidation levels.
When approaching these levels, prepare for potential breakouts or breakdowns caused by liquidations.
Example: If you expect a short squeeze, you could enter a long position near a support level and ride the price upward as shorts are liquidated.
3. Monitor Open Interest and Liquidation Data
Many platforms provide open interest and liquidation heatmaps (e.g., Binance, Bybit).
Open Interest: Shows the number of open contracts in the market. Spikes near critical price levels may indicate crowded trades.
Liquidation Heatmaps: These show where large concentrations of liquidation levels are, helping you anticipate potential market moves.
4. Use Liquidation Levels to Improve Your Entry Timing
Wait for Liquidation Events to Enter Trades:
After significant liquidation events (e.g., price hits a level with many liquidations and then reverses), markets often stabilize or reverse.
Strategy: Let liquidations clear out weak positions, then enter at a better price once the market direction becomes clearer.
Example:
If Bitcoin has a major support at $28,000 and you see liquidations clearing out positions below $28,000, consider entering after the liquidations if the market starts to recover.
5. Hedging Positions
If you’re holding a long-term position and expect a short-term dip toward your liquidation level, you can open a hedge (short position) on a smaller timeframe. This reduces potential losses and protects your portfolio.
Summary: Steps to Trade Liquidation Levels Effectively
Know Your Liquidation Level:
Calculate this before opening any position and ensure your stop-loss is well above it.
Analyze the Market for Liquidation Zones:
Use heatmaps, open interest data, and historical levels where liquidations commonly occur.
Enter After Liquidations:
Wait for a liquidation cascade to end, then enter at a more favorable price.
Always Manage Risk:
Use stop losses and proper position sizing to avoid hitting your liquidation level unnecessarily.
By understanding and incorporating liquidation dynamics into your trading, you can protect yourself from significant losses and even capitalize on market inefficiencies.