Liquidations in the crypto market: how to read cascades, find points of interest, and use them in trading

Liquidations are one of the clearest ways to understand what is happening in the cryptocurrency futures market.** They show where the price movement was so strong that leveraged traders could no longer hold their positions.

When liquidations spike, the market can accelerate sharply. Sometimes this leads to a trend continuation, and other times to a swift reversal. The difference between these scenarios is crucial for trading.

In this article, we will break down in simple terms what liquidations mean, why cascades occur, how to interpret major events, and what signals to look for on the chart to make more informed trading decisions.

1. What is a liquidation in simple terms

Imagine a trader has $1,000 and wants to open a $10,000 position. They use 10x leverage.

This means that with a 1% price movement, the profit or loss on the position will be about $100 — that is, 10% of the initial collateral, excluding fees and other expenses.

If the price moves against the trader, the losses grow quickly. When funds become insufficient to maintain the position, the exchange forcibly closes it. This is called a liquidation.

In practice, things are slightly more complex: the exact liquidation price depends on exchange rules, position size, maintenance margin, margin mode, and other parameters. In addition, liquidation is usually tied to the Mark Price, which may differ from the last traded price.

But to understand the market, the main takeaway is simple: liquidation is a forced position closure that the trader can no longer control at their discretion.

2. Long and short liquidations: what is the difference

There are two main trading directions in the futures market.

• Long — a position that profits when the price rises.
• Short — a position that profits when the price falls.

If the market moves against the position, the exchange may forcibly close it.

Long liquidations

Suppose the Bitcoin price starts to drop. Traders who bought BTC with leverage incur losses. When the price hits critical levels, exchanges begin to forcibly close their positions.

Closing a long creates selling pressure. If the market lacks liquidity, the price may drop even further.

This creates a chain reaction:

Price drop → long liquidations → additional selling → further decline.

Short liquidations

Now let's look at the opposite situation. The price starts to rise, and traders who opened downward positions incur losses.

When their positions reach the liquidation level, the exchange forcibly closes the shorts. To close a short position, it is necessary to buy the asset or the corresponding contract.

These forced purchases can accelerate price growth.

Price growth → short liquidations → additional purchases → further growth.

This is why during sharp market movements, you can observe rapid price impulses that look disproportionately strong relative to the initial event.

3. What is a liquidation cascade

A liquidation cascade is a chain reaction where the forced closure of some positions helps the price reach the liquidation levels of other positions.

Imagine that Bitcoin is trading around $100,000. There are many traders in the market who have opened long positions with high leverage. Their positions have close liquidation levels.

The price starts to decline. First, some of the most vulnerable positions are closed. Forced sales intensify the drop, and the price reaches the next group of levels. Then even more positions are closed.

As a result, the movement can accelerate on its own, even if the initial cause of the drop was relatively small.

Cascades occur not only because of leverage. Their strength is also determined by order book depth, available liquidity, position concentration, and the rate of price change.

The most dangerous situation arises when three conditions are present simultaneously:

1. A large number of positions are concentrated in one direction.
2. Many traders use high leverage.
3. There are not enough counter-orders in the order book to absorb the forced purchases or sales.

When these factors combine, the market can travel a significant distance in a short time.

4. What large liquidations mean

Large liquidations are often perceived as an independent trading signal. However, their meaning depends on the context.

The same volume of liquidations can mean completely different things at the start of a trend, at its peak, or after a prolonged movement.

Scenario A. Large long liquidations during a drop

If the price is declining and the volume of long liquidations increases sharply, this indicates that forced closures are intensifying selling pressure.

But two outcomes are possible here.

Option one — the drop continues.

Liquidations trigger a new wave of selling. The price breaks support, opens the way to the next liquidity levels, and continues to decline.

Option two: sellers are gradually running out of pressure.

Most of the most vulnerable longs are already closed. The price stops falling, although liquidations remain high. Aggressive buyers appear, and new lows do not lead to a further acceleration of the drop.

In this case, you can observe the formation of a local bottom.

Important: the mere fact of a large volume of liquidations does not confirm that the bottom has already formed. The confirmation is the market's reaction after the forced sales.

Scenario C. Large short liquidations during a rise

During a strong price increase, short liquidations can act as additional fuel for upward movement.

If the price breaks resistance, forced purchases accelerate the momentum. This can lead to further growth, especially if strong demand remains in the market.

However, after the closure of a large number of shorts, the pressure of forced buyers may weaken. If new buyers do not arrive, the growth can stop or turn into a correction.

Therefore, large short liquidations do not automatically mean that you need to open a long. Sometimes the movement is just beginning, and sometimes the main part of the momentum is already behind.

5. What usually happens after a liquidation cascade

The market does not have a single scenario that repeats after every cascade. But for practical analysis, it is useful to distinguish three main options.

1. Continuation of the movement

The cascade reinforces the existing trend. The price breaks an important level, and counter-demand or supply is not enough to stop the movement.

Signs of this scenario:

• the price confidently holds beyond the broken level;
• the trade volume supports the direction of movement;
• after liquidations, the price does not quickly return to the previous range;
• open interest and the flow of aggressive trades behave in sync with the current movement.

In this case, the cascade may not be the end of the movement, but its acceleration.

2. Movement exhaustion and consolidation

After the mass closure of positions, the price stops moving at its previous speed. Volatility may remain high, but new extremes no longer lead to a noticeable continuation of the impulse.

Possible signs:

• the volume of liquidations decreases;
• the price stops updating lows or highs;
• aggressive trades no longer yield the previous result;
• the price begins to move in a narrow range.

This may mean that the main wave of forced closures has finished. However, the market still requires additional demand or supply for a new trend to emerge.

3. Sharp Price Reversal

Sometimes a cascade leads to a move that quickly loses momentum. The price breaks a level, triggers forced closures, and almost immediately reverses.

Such a movement may be caused by insufficient liquidity, large counter-orders, or a lack of follow-through from new participants.

For example, after massive long liquidations, the price quickly breaks a low but then moves back above the broken support. If sellers cannot push the market down again, a recovery scenario forms.

A similar situation is possible after short liquidations: the price breaks resistance, rises sharply, and then falls back below it.

Key takeaway: after a cascade, it is necessary to monitor not only how many positions were liquidated, but also what the price does after the main wave of forced closures ends.

6. Why the Liquidation Amount by Itself Tells Us Very Little

Suppose $100 million worth of liquidations occurred in the market over a short period.

It looks impressive. But without additional information, this figure does not give a complete picture of the situation.

It is necessary to understand:

• which asset was traded;
• over what period the events are summed up;
• how much came from longs and how much from shorts;
• on which exchanges the liquidations took place;
• how large the market was relative to this volume;
• what happened to the price before, during, and after the event;
• how deep the available liquidity was.

In addition, the sum of liquidated positions does not equal the amount of money lost by traders. This is generally the nominal value of the closed positions, rather than the size of their collateral or actual loss.

Another important distinction is between actual liquidations and projected liquidation levels.

Actual data shows events that have already occurred and entered the data feed of a specific source.

Projected zones show where vulnerable positions could potentially be located. Such zones are calculated by models and do not represent an exact map of all real trader positions.

Open exchange data generally does not allow us to see the full picture for every market participant. Therefore, any estimates of future liquidations should be viewed as probabilistic guidelines rather than guaranteed levels.

7. How to Use Liquidation Data in Trading

The most useful approach is to use liquidations not as a standalone signal, but as a tool to find market situations worth studying in more detail.

Strategy #1. Finding a potential reversal after a cascade

This is a scenario where a trader waits for forced closures to stop fueling the movement.

Suppose Bitcoin is declining rapidly, and a large series of long liquidations appears on the chart.

Instead of buying immediately, you can watch for the following signs:

1. The price stops confidently updating lows.
2. The volume of new liquidations decreases.
3. Aggressive buying or signs of selling absorption appear.
4. The price returns above the broken level or forms a local recovery structure.

Once confirmation appears, you can consider a trade in the direction of price recovery.

Where the idea stops working: if the price continues to decline steadily and each new bounce is quickly sold off, the cascade may not be over yet.

In this case, trying to catch the bottom becomes trading against a strong momentum.

Strategy #2. Trading the continuation of the cascade

Here the logic is the opposite. The trader does not try to catch a reversal, but looks for confirmation that forced closures are supporting the current direction.

For example, the Bitcoin price is falling, long liquidations are growing, and key support is broken.

If the price consolidates below the level, and recovery attempts are met with active selling, you can consider the continuation of the downward movement.

For an upward scenario, the conditions are mirrored: resistance breakout, short liquidations, and sustained price maintenance above the level.

At the same time, it is important not to enter too late. After a strong cascade, the price may have already covered most of the available move. Entering at maximum acceleration often means a poor risk-to-reward ratio.

Strategy #3. Finding a fakeout

One of the most interesting scenarios occurs when the price breaks out of an important level, triggers liquidations, but fails to hold beyond the range boundary.

For example:

• the price breaks support;
• a series of long liquidations begins;
• the market quickly returns above support;
• sellers fail to re-consolidate the price below the level.

Such behavior may indicate a failed breakout and weakening selling pressure.

In this situation, a trader can consider a move back inside the range if it is confirmed by the price structure and order flow.

A similar scenario works at resistance after short liquidations.

But it is important to remember: a false breakout cannot be determined by a single large liquidation alone. It is necessary to wait for the actual price reaction.

Strategy No. 4. Using Potential Liquidation Zones

Heatmaps and liquidation estimation models help identify price areas where a significant concentration of vulnerable positions may be located.

Such zones are useful as reference points for observation. When the price approaches them, the probability of an acceleration in movement can be assessed.

However, a potential liquidation zone is not a promise that the price will necessarily reach that level.

The price may reverse earlier, pass through the zone without noticeable acceleration, or move significantly further.

Therefore, it is best to use such areas together with support and resistance levels, open interest, volume, and actual market reaction.

8. How to Combine Liquidations, OI, CVD, and Volume

To improve the quality of analysis, it is useful to combine several indicators. Each of them answers its own question.

Liquidations: Who is forced to close positions?

They show the direction and scale of forced closures available from a specific data source.

OI — Open Interest: What is happening with open positions?

Open interest reflects the volume of unclosed derivative contracts.

Its change helps understand whether the total volume of open positions is growing or shrinking.

• Price rises, OI rises: The volume of open contracts increases against the backdrop of rising prices. This may be accompanied by an inflow of new positions, but by itself it does not show who will be right.
• Price falls, OI rises: Market positions increase during the decline. This may mean the opening of new positions, including shorts, but the participants' direction cannot be determined by OI alone.
• Price moves, OI drops sharply: Part of the open contracts are closed. If liquidations are growing at the same time, this may indicate position reduction as a result of forced closures and other ways of exiting the market.

Important caveat: OI is an aggregate indicator. Every futures contract has two sides, so a rise in OI does not automatically mean the market has become "bullish" or "bearish."

CVD — Cumulative Volume Delta: Who is acting more aggressively?

CVD shows the accumulated difference between the volume of aggressive buying and aggressive selling within a specific source's methodology.

If the price declines, but CVD starts to grow, one can assume that buyers have become more active. This sometimes helps to spot a weakening of selling pressure.

If the price grows while CVD falls, this may indicate an increase in aggressive selling or a divergence between the price and the order flow.

However, CVD does not show all market participants and does not reveal the intentions of every large player. It should be analyzed in the context of a specific exchange, instrument, and chosen timeframe.

Volume and Order Book: Can the Market Absorb the Pressure?

Volume helps assess trading intensity, while the order book shows available limit orders at a specific moment in time.

If, after large liquidations, the price stops moving even though volume remains high, counter-orders may be absorbing the pressure.

However, visible limit orders can be canceled or moved, so they cannot be considered guaranteed support or resistance.

How to Combine Metrics

Let's look at an example of a potential reversal after a drop:

• long liquidations spiked sharply;
• OI decreased;
• the price stopped making new lows;
• CVD began to recover;
• the price moved back above the local level.

Taken together, these signs provide a reason to take a closer look at a recovery scenario.

If, however, after liquidations the price continues to drop, OI grows, and aggressive selling persists, there may not be enough grounds to consider the cascade complete.

No combination of indicators guarantees a result. Its purpose is to improve the quality of the context, not to replace risk management.

9. Practical Example: How to Read the Market After a Large Liquidation

Let's imagine a hypothetical situation on BTCUSDT.

The price drops from $100,000 to $97,500. During this decline, the volume of long liquidations spikes sharply.

What to do with this information?

Step 1. Determine the nature of the move.

If the price falls rapidly and with almost no pullbacks, do not automatically buy just because the liquidations have become large.

Step 2. Look at the open interest.

If OI drops sharply, this aligns with a portion of positions exiting the market. But not all closures are liquidations, so it is important to consider other data.

Step 3. Check the price reaction.

After dropping to $97,500, the price tries to fall even lower, but gets no continuation. Sellers become less efficient, and the price returns to $98,000.

Step 4. Wait for confirmation.

If the price holds above a local level and signs of strengthening buyers appear, a recovery scenario can be considered.

Step 5. Define risk in advance.

Before entering, you must choose the level at which the trading idea ceases to be relevant and calculate the position size taking potential loss into account.

There is no guarantee of profit in this sequence. The point of the approach is different: the trader does not try to guess the exact bottom, but waits for confirmation that the initial pressure is easing.

10. Most Common Mistakes in Liquidation Analysis

Mistake 1. Buying after any large long liquidations

Large liquidations can be a sign of buyer capitulation, but they can also accompany the start of a deeper drop.

Mistake 2. Selling immediately after large short liquidations

Forced buying can accelerate growth, but the market is capable of continuing its movement if demand remains strong.

Mistake 3. Treating the heatmap as an exact map of real positions

Many potential liquidation maps are built on models and assumptions. They do not reveal all real liquidation levels of all market participants.

Mistake 4. Ignoring differences between exchanges

Different platforms have their own position structures, margin rules, liquidation mechanisms, and data transmission features. Aggregated indicators help see the big picture, but can hide important differences.

Mistake 5. Using only a single indicator

Liquidations without price, OI, and volume provide a limited view of the situation. A large number of events still does not explain why the price moved the way it did and what will happen next.

Mistake 6. Entering too late

When the cascade has already traveled most of its path, potential profit may be significantly less than potential risk. Sometimes it is better to miss a move than to try to catch up with it.

Mistake 7. Trading without a pre-defined risk

Even high-quality analysis can turn out to be wrong. Stop-loss, position size, and acceptable loss must be determined before opening a trade, not after an adverse movement begins.

11. How to use LiqScope for market analysis

LiqScope combines several types of market data that are useful to view together.

Candlestick chart with liquidations helps see on which parts of the movement forced closures occurred and whether they coincided with level breakouts or sharp impulses.

Liquidation clusters allow you to highlight specific events and groups of events that deserve attention. It is especially useful to compare them with the price reaction immediately after a cluster appears.

The liquidation price profile helps to study the distribution of recorded events across levels over a selected period. When interpreting it, it is important to consider that this profile reflects collected data, not all existing potential liquidations.

Open Interest (OI) adds information about changes in the volume of open contracts. This helps to assess whether a movement is accompanied by an expansion or contraction of aggregate positions.

CVD and trade flow help analyze aggressive buying and selling and assess whether pressure is maintained in the direction of the movement.

Multi-exchange data provides a broader market overview than information from a single platform. However, the completeness of the aggregated picture depends on the availability of feeds, supported instruments, deduplication, and data quality.

The practical algorithm is simple:

1. Find a notable liquidation cluster.
2. Determine the direction of price movement before and during the event.
3. Compare the changes in OI and CVD.
4. See whether the movement continued after the liquidations or if the price retraced.
5. Formulate two scenarios: continuation of the movement and a potential reversal.
6. Wait for confirmation of one of the scenarios and pre-determine the risk.

This is how the terminal becomes not just a feed of large events, but a tool for researching market structure.

12. Can you trade liquidations profitably on a consistent basis?

Using liquidations can improve your understanding of the market, but it does not guarantee a positive trading result.

To test a trading idea, it is necessary to examine historical data, define specific entry and exit rules, and account for fees, slippage, and data feed latency. Then you should check whether the result holds across other timeframes, assets, and market conditions.

For example, the hypothesis «after large long liquidations, the price usually recovers» is too vague for trading.

It needs to be refined:

• what constitutes a large liquidation relative to the normal volume of a specific asset;
• what timeframe to use for evaluating the event;
• what conditions must be met regarding OI, CVD, and price;
• after how much time to measure the result;
• how to determine the entry point, stop-loss, and exit;
• how to account for trades that were not executed at the calculated price.

Only after that can you evaluate the win rate, average result, maximum drawdown, and strategy stability.

It is also important to consider the quality of the initial data: missed events, delays, differences between exchanges, and changes in the calculation methodology can significantly impact testing results.

Therefore, it is better to view liquidations as one of the elements of a trading system rather than as an independent source of guaranteed profit.

Conclusion

Liquidations help identify moments when the market forces participants to close positions. They explain why a regular price movement sometimes turns into a sharp impulse and why, after a strong cascade, the market can either continue moving or transition into consolidation or a reversal.

The main thing is not to try to guess the market based on a single figure.

Large long liquidations show the pressure of forced selling. Large short liquidations show the pressure of forced buying. But the subsequent movement depends on whether there is still demand or supply in the market capable of sustaining the impulse after the cascade finishes.

The most useful question after a major event is not: "How much money was liquidated?"

It is more correct to ask: "How did the price react to the forced closures, and did the movement have any continuation?"

This is precisely where liquidation data acquires practical value.

LiqScope helps explore this relationship by combining liquidations, price, open interest, and order flow. And the trader's task is to correlate the data, wait for scenario confirmation, and manage risk if the market moves in an unexpected direction.

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This material is educational and does not constitute an individual investment recommendation. Trading cryptocurrency derivatives with leverage involves a high risk of capital loss. No indicator or scenario guarantees profit.