What is a liquidation heatmap?
In short, it predicts the price levels at which large-scale liquidation events may occur. A liquidation heatmap is a data visualization chart that highlights price levels in the derivatives market where large leveraged positions are at risk of liquidation. The intensity of the colors reflects the concentration of potential liquidations—the brighter the area, the greater the liquidation pressure.
This map typically generates using order book data and funding rates, average leverage, and long and short positions from major exchanges like Binance, Bybit, and OKX. Popular platforms providing liquidation heatmaps include Coinglass, Hyblock Capital, and Decentrader.
Why is the liquidation heatmap important?
In the derivatives market, especially in markets where high leverage is widely used, if prices exceed a certain threshold, positions may be liquidated. When many traders cluster their stop-loss or liquidation points around the same price level, a high-pressure zone is formed. These areas often become targets for whales or trading algorithms, triggering large-scale liquidations, which can lead to a domino effect and sharp price fluctuations.
The primary reason the liquidation heatmap has become a valuable tool:
Identifying unconventional support/resistance areas: It relies not only on technical analysis but also combines real leverage position data to highlight meaningful levels.
Predicting potential price volatility: When prices approach vivid areas, the likelihood of sharp fluctuations increases due to liquidation triggers or deliberate price manipulation.
Optimizing entry points: Traders can avoid entering positions near areas that might be swept by liquidation cascades initiated by large participants.
Structure of the liquidation heatmap
A standard liquidation heatmap typically consists of the following components:
X-axis (horizontal): Displays real-time or historical data segmented by hours or days.
Y-axis (vertical): Represents the price level of the underlying asset (e.g., BTC, ETH).
Color gradient: Indicates the intensity of potential liquidations. Brighter colors (yellow/red) signify denser liquidation clusters, while darker colors (purple or deep blue) represent lower-risk areas.
Current price indicator: Typically displayed as an overlay of candlestick charts, allowing users to visually see the relationship between price behavior and liquidation zones.
Color legend: Usually located beside the map, showing the absolute or relative size of liquidation pressure (measured by position count or nominal trading volume in USD).
How to interpret and analyze the liquidation heatmap
Bright yellow, light blue, or light red areas typically indicate regions where large leveraged positions face liquidation risk. These areas are key zones to closely monitor when analyzing the heatmap.
For example, on Coinglass's Ethereum liquidation heatmap, we observe a significant yellow cluster around the price level of approximately $4488. This indicates a high concentration of open long positions in that area. If the price approaches and falls below this level, a series of long liquidations may occur, potentially accelerating the downward momentum of prices.
Areas above the current price are typically viewed as resistance levels formed by open short positions. If prices continue to rise to these zones, these short positions will face liquidation risk. This could trigger a wave of buying—commonly known as a short squeeze—further pushing prices up.
In contrast, areas below the current price often concentrate long positions. If the price drops to these lower zones, these long positions may be liquidated, increasing downward selling pressure (long liquidation) and pushing prices further down.
When prices approach either of these two zones, the market often reacts violently due to sudden shifts in liquidity and trader sentiment.
By monitoring the candlestick charts overlaid on the heatmap, you can assess whether the price is approaching high-risk liquidation areas or has already breached those zones. This insight is particularly useful for predicting potential pullbacks or identifying false breakouts.
Finally, the liquidation indicators, as one of many indicators, can only serve as a reference. They can guide market target areas but cannot determine the course of market trends.
The liquidation heatmap is becoming an essential tool for professional traders seeking direction in the increasingly competitive derivatives market. Correctly interpreting the heatmap not only helps avoid sudden liquidations but also allows you to better seize entry opportunities, thereby fully utilizing liquidation chances.
That said, like any tool, it is not a panacea. True trading advantage lies in skillfully combining the liquidation heatmap with other market data and indicators. Most importantly, maintain discipline and adhere to robust risk management practices.
