Liquidations Meter
Nov 9, 2023
The Liquidation Meter is a powerful trading indicator designed to assist traders in evaluating market momentum, gauging the strength of bulls and bears, and identifying potential reversal and exhaustion points by analyzing probable liquidations. This tool is essential for traders seeking insight into market dynamics and risk assessment.
How to Trade with the Liquidation Meter?
This indicator features a comprehensive suite of tools related to the concept of liquidation. At its core are the liquidation meter and liquidation price calculator, which provide key functionalities for traders in any asset class.
Understanding the Liquidation Meter
The liquidation meter overlays liquidation data directly on price charts by determining the highest possible leverage values of long and short positions that may have been liquidated during the last chart bar. This equips traders to:
- Assess the momentum of a trading bar.
- Evaluate the strength of bulls and bears in the market.
- Detect potential reversal or exhaustion signals.
Monitoring the liquidation of low-leveraged positions can indicate potential market exhaustion, giving traders an edge in anticipating market turns.
Using the Liquidation Price Calculator
The liquidation price calculator is an invaluable tool for traders looking to determine the price level at which their leveraged positions in markets like Crypto, Forex, or Stocks will be liquidated, helping them set protective stops and manage risk effectively. Calculating potential liquidation points allows traders to better manage their positions by assessing total risk and choosing appropriate leverage and margin.
A liquidation price represents the gap between a trader’s entry price and the level at which a leveraged position gets liquidated. Higher leverage naturally shortens this gap, intensifying risk.
For traders with multiple open positions, quickly assessing which trades are closest to their liquidation points is vital for effective portfolio management.
Day traders using leverage can evaluate the liquidation price of trades to determine the most favorable market opportunities.
Exploring the Dashboard Feature
The dashboard offers detailed bar statistics, enabling traders to measure and visualize activity, volatility, and potential liquidations over the most recent chart bar.
Understanding Details & Calculations
The liquidation price calculator employs a straightforward formula based on the entry price and leverage ratio. It's important to note that it does not account for leveraged fees, position size, or other potential payments since these are variables that don't directly affect liquidation determinations for a leveraged position. The calculator assumes using an isolated margin for a single position, excluding any additional margin in the trader's account.
Liquidation Price Calculation Formula
the liquidation distance in percentage = 100 / leverage ratio
the liquidation distance in price = current asset price x the liquidation distance in percentage
the liquidation price (longs) = current asset price – the liquidation distance in price
the liquidation price (shorts) = current asset price + the liquidation distance in price
Alternatively:
the liquidation price (longs) = entry price * (1 – 1 / leverage ratio)
the liquidation price (shorts) = entry price * (1 + 1 / leverage ratio)
[quote] Example: Let’s say that you are trading a leverage ratio of 1:20. The first step is to calculate the distance to your liquidation point in percentage. [/quote]
the liquidation distance in percentage = 100 / 20 = 5%
This calculation indicates that your liquidation price is 5% away from your entry price. For example, if trading bitcoin at a price of $35,000:
the liquidation distance in price = $35,000 x 0.05 = $1,750
Resulting in liquidation prices of:
the liquidation price (longs) = $35,000 – $1,750 = $33,250
the liquidation price (short) = $35,000 + $1,750 = $36,750
In this example, the short liquidation price is $36,750 while the long liquidation price is $33,250.
Impact of Leverage Ratio on Liquidation Price
The entry price serves as the baseline for calculating liquidation prices. Higher leverage reduces the safety margin, increasing the risk of total liquidation. Conversely, utilizing lower leverage grants more leeway for market fluctuations.
Fine-Tuning Settings
Tailoring the Liquidations Meter
- Base Price: Allows setting the reference/base price for calculations.
Configuring the Liquidation Price Calculator
- Liquidation Price Calculator: Enables or disables the calculator's visibility on charts, with detailed assumptions available in tooltips.
- Entry Price: Allows setting the entry price; a default of 0 uses the current closing price.
- Leverage: Sets the leverage value.
- Show Calculated Liquidation Prices on the Chart: Toggles visibility for calculated liquidation prices on charts.
Utilizing Dashboard Options
- Show Bar Statistics: Toggles visibility of the latest bar statistics summaries.
Additional Settings
- Liquidations Meter Text Size: Adjusts text size for the Liquidations Meter.
- Liquidations Meter Offset: Modifies the Liquidations Meter's position.
- Dashboard/Calculator Placement: Determines positioning of dashboard/calculator on charts.
- Dashboard/Calculator Text Size: Adjusts text size for dashboard elements.
Explore Related Scripts
To further explore liquidation and liquidity concepts, the following related scripts are available:
Frequently Asked Questions
How can I access the Liquidation Meter? You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.
What are the benefits of using a liquidation calculator? It provides precise calculations for setting protective stops, which aids in effective risk management when trading with leverage.
Why is tracking momentum important? Understanding momentum helps traders forecast price movements and identify potential trend reversals.
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