Understanding How Forced Liquidations / Stop Hunts are DesignedIn this write up I will explain how we can extrapolate our knowledge of stop loss orders to understand the automatic execution of what are known as forced liquidations or stop hunts.
We will understand the mechanics of how Bitcoin can achieve such speed of movement and how to predict these events by reading the charts with a unique perspective of pre-design of these events.
Our first goal with viewing the Bitcoin chart is to remain objective and without personal bias. We should have no emotional attachment or opinion when it comes to trading and asset effectively.
Due to the lack of regulations in the crypto market and our knowledge of for-profit ventures benefiting off the liquidations of traders positions, we can strive to align ourselves with these forces so long as we decide to actively trade this market.
We can begin by understanding what drives Bitcoins price up and down. Unlike equities that have relational value to real world output via job creation, product sales, infrastructure, P&L reports, etc - Bitcoin is in a different class of assets lacking intrinsic value and belong to what I like to call “perceived value assets”. This means the evaluation of price is based on an agreed upon value, defined only by liquidity flowing into and out of the asset.
This creates the “volatile” nature you hear about in crypto assets. Prices are very fluid and move up and down extraordinarily fast at specific times that may seem random.
The executable actions that impact the price is the fulfillment of orders; buys and sells. Where things get interesting is in understanding stop loss orders and their accumulation.
Stop losses are effectively limit orders that reverse the position of traders by returning liquidity into the Bitcoin market cap or by pulling it out of the market cap; depending if the stop loss is for a LONG or SHORT. While it may be hard to grasp how the futures market has a direct effect on Bitcoins price, we must understand that in futures we are simply instructing Market Makers what to do with their assets by borrowing the leverage to our margin and in effect they will sell or buy Bitcoin. The stop losses of these trades are the direct opposition and not only is it in the Market Makers interest to ensure you aren’t taking money from them, attacking the stop losses and liquidations of your trades has a factual benefit to both the exchanges and market makers who collect your position margin once liquidation level is hit.
Understanding this we can look at the bitcoin chart and make sense of accumulation of stop loss orders; shown here in my boxes (green are buy orders / short stops, red are sell orders / long stops).
We can gauge for ourselves the amount of stop losses accumulated and predict the speed of bitcoins movement and clear interest in setting up a two way liquidation.
Now why would a two way liquidation of such magnitude occur?
The answer is to do with the US Dollar just underneath a major bearish retest on the 3 month chart. An entry into a bull market is would be a key time to execute a dramatic liquidation on Bitcoins chart, as we see here there is a chain reaction ready to hit both the top and bottom level I have marked.
As the stop loss orders are hit, there is accumulating power sent into the next level, which creates exponential speed of movement and this is what we like to call “stop hunts”.
Hopefully this article is helpful and allows you to understand how we can decipher the chart in a way that allows us to forecast out these movements and ideally prove that these “unpredictable” movements are in fact quite predictable after all.
- Dick Dandy
