Opinion: The practicality of liquidation heatmaps is vastly overestimated and should not constitute a significant component within trading systems.

BlockBeats news, September 28: Coinkarma founder Benson Sun stated that the usefulness of liquidation heatmaps is vastly overrated. Many traders now see a large cluster of liquidations at a certain price level and directly interpret it as "the price will definitely go sweep this area." But the liquidation map itself contains many assumptions. Most liquidation heatmaps are constructed by taking historical market trade data and applying a set of assumed leverage multiples, such as 5x, 10x, 20x, 30x, 50x, to back out the price levels at which those positions "might" be liquidated.

So the dense liquidation zones users see do not mean there are actually identical amounts of positions sitting there waiting to be blown up; there are too many variables in between. These people may have already exited. Some will add to positions, some will reduce positions, some will top up margin. As long as position size, margin, or average cost changes, the liquidation heatmap will shift accordingly. The longer the time horizon, the larger this error becomes.

Therefore, the most valuable reference range for liquidation heatmaps is roughly the most recent 24 hours to 3 days. Looking further back at 7 days, 30 days, or even liquidation clusters from several months ago and treating them as current "magnet price levels" is meaningless. Liquidation heatmaps can be used as auxiliary information for short-term market structure, but they should not occupy too large a component in a trading system, because they easily create a false sense of certainty. Above and below the price, there will always be dense liquidation zones. If price rises, it can be said that it first swept the shorts above. If price falls, it can be said that it first swept the longs below. If it falls first and then rises, it can be said that it swept longs first and then shorts. No matter what happens, there is always an after-the-fact explanation, and it is very difficult to falsify in advance, which makes it not an analytical tool but pure mysticism.