Liquidation Trading: How to Trade Squeezes and Cascades
Liquidations create the most explosive moves in crypto. Learn to identify squeeze setups, trade cascade events, and profit from forced buying and selling.
- Liquidations = forced position closures. They cascade when each liquidation triggers the next.
- Short squeezes = forced buying on rising prices. Long squeezes = forced selling on falling prices.
- Thrive tracks liquidation levels and alerts you when squeeze conditions are forming.
See Liquidation Cascades in Action
Watch how liquidations cascade through different scenarios:
Cascading long liquidations driving price down
Total Liquidated
$25M
Current Level
$67,000
Long positions are stacked with leveraged entries around $67,000. As price drops, stops and liquidations cascade. Each liquidation adds sell pressure, pushing price lower and triggering more liquidations. This creates a waterfall effect until the leverage is flushed.
Wait for the cascade to exhaust. Look for signs: volume spike, delta turning positive, price stabilization. Enter long at the exhaustion point with stops below. Or, if you identified the setup early, short the breakdown through $67,000 with targets at major liquidation levels.
What Are Liquidations?
A liquidation occurs when a leveraged position is force-closed because the trader's margin can no longer cover potential losses. When you trade with 10x leverage and the market moves 10% against you, you lose 100% of your margin.
When liquidations happen:
- Long liquidation: Position is force-sold at market price (adds sell pressure)
- Short liquidation: Position is force-bought at market price (adds buy pressure)
The key insight: liquidations are market orders. They execute immediately at whatever price is available, often causing slippage and pushing price further in the same direction—which triggers more liquidations.
Understanding Short Squeezes
A short squeeze occurs when rising prices force short sellers to buy back their positions. Each buy pushes price higher, triggering more short liquidations, creating a feedback loop.
Anatomy of a Short Squeeze
- Setup: Shorts are crowded (negative funding, high short OI)
- Catalyst: Price starts rising—could be news, whale buying, or technical breakout
- First liquidations: Highest-leverage shorts get liquidated, adding buy pressure
- Cascade: Each liquidation pushes price higher, triggering the next level
- Acceleration: Price goes vertical as forced buying overwhelms sellers
- Exhaustion: Shorts are flushed, buying slows, price stabilizes or reverses
Signs a Short Squeeze Is Likely
- Deeply negative funding rate: Shorts are paying longs—crowded positioning
- High open interest: Lots of leveraged positions in the market
- Price near resistance: Breakout would trigger stops and liquidations
- Volume increasing on up moves: Buyers getting aggressive
Understanding Long Squeezes
A long squeeze is the mirror image—falling prices force long positions to liquidate. Each liquidation is a market sell, pushing price lower and triggering more liquidations.
Anatomy of a Long Squeeze
- Setup: Longs are crowded (positive funding, high long OI)
- Catalyst: Price starts falling—news, whale selling, support break
- First liquidations: Highest-leverage longs get liquidated, adding sell pressure
- Cascade: Each liquidation pushes price lower, triggering the next level
- Waterfall: Price drops in steps as each liquidation level triggers
- Exhaustion: Longs are flushed, selling slows, price stabilizes
Signs a Long Squeeze Is Likely
- High positive funding rate: Longs are paying shorts—crowded positioning
- Price at support: Break would trigger stops and liquidations
- Declining volume on bounces: Buyers getting exhausted
- Open interest not falling: Longs are holding, not de-risking
| Type | Positioning | Price Direction | Funding | Trade |
|---|---|---|---|---|
| Short Squeeze | Shorts crowded | Up (sharply) | Negative | Long with momentum |
| Long Squeeze | Longs crowded | Down (sharply) | Positive | Short with momentum |
| Liquidation Hunt | Either | Whipsaw | Any | Fade after sweep |
| Cascade | Either | Vertical | Extreme | Trail with trend |
Finding Liquidation Levels
Liquidations cluster at predictable price levels. Knowing where they sit helps you anticipate cascades and avoid being liquidated yourself.
Where Liquidations Cluster
- Recent swing highs/lows: Traders enter with stops at these obvious levels
- Round numbers: $60K, $65K, $70K—psychological levels attract leveraged entries
- High OI buildup zones: Where open interest spiked indicates entry clusters
- Exchange-specific data: Some tools show estimated liquidation levels by exchange
Estimating Liquidation Prices
Rough calculation: Entry price × (1 - 1/leverage) = liquidation price for longs. Entry price × (1 + 1/leverage) = liquidation price for shorts. With 10x leverage, liquidation is ~10% from entry.
This means if a major swing low was $65,000, long liquidations cluster around $58,500-$61,500 (10-20x leverage entries at the low).
How to Trade Squeezes
Strategy 1: Ride the Squeeze
- Identify crowded positioning: Extreme funding + high OI on one side
- Wait for price to move against the crowd: Don't front-run
- Enter when cascade begins: First liquidations confirm the squeeze is on
- Trail your stop: Move stop to breakeven quickly, then trail
- Exit when liquidations slow: Watch OI—when it drops sharply, squeeze is ending
Strategy 2: Fade the Exhaustion
- Wait for squeeze to complete: OI drops, funding normalizes, price stabilizes
- Look for reversal signals: Absorption, structure break, delta divergence
- Enter counter-trend: After squeeze exhaustion, mean reversion often follows
- Tight stop: If squeeze continues, you're wrong—cut fast
Strategy 3: Liquidation Hunt Trading
- Identify liquidation clusters: Where are leveraged stops sitting?
- Wait for price to sweep: Price takes out the cluster
- Enter on reversal: Once liquidity is taken, trade the reversal
- Stop beyond sweep: If it wasn't a hunt and continues, exit
Open Interest and Funding Rate
OI and funding are your primary tools for assessing liquidation risk.
Open Interest (OI)
- Rising OI + rising price: New longs entering. Long squeeze risk building.
- Rising OI + falling price: New shorts entering. Short squeeze risk building.
- Falling OI + price moving: Positions closing. Squeeze may be ending.
- High absolute OI: Lots of leverage in the market. Volatility likely.
Funding Rate
- Highly positive funding: Longs paying shorts. Longs are crowded.
- Highly negative funding: Shorts paying longs. Shorts are crowded.
- Extreme funding + price against it: Squeeze conditions present.
The combination of high OI + extreme funding + price reversal is the classic squeeze setup.
Related reading: Crypto Trading Signals for more on OI and funding.
Risk Management in Liquidation Trades
Squeeze trades can be highly profitable but also highly dangerous. The same forces that create opportunity can work against you.
- Size appropriately: Squeezes are volatile. Smaller size, wider stops.
- Don't fight the trend: If you're caught wrong-side in a squeeze, cut immediately.
- Avoid being the liquidity: Don't place stops at obvious levels.
- Use market orders to exit: In cascades, limit orders may not fill. Use market.
- Have exit plans before entry: Know your stop and target before the trade.
- Don't overstay: Squeeze profits can evaporate on reversal. Take profits.
Common Mistakes
- Front-running squeezes: Trying to enter before it starts. Wait for confirmation.
- Fading early: Counter-trading a squeeze too soon. Wait for exhaustion.
- Using high leverage: Ironic—you become liquidation fuel. Use low leverage.
- Ignoring context: Not all extreme funding leads to squeezes. Need a catalyst.
- Holding through reversal: Squeeze profits disappear fast. Exit when it slows.
Frequently Asked Questions
What is a liquidation in crypto trading?
A liquidation occurs when a leveraged position is force-closed by the exchange because it has reached its liquidation price. The trader's collateral is used to close the position, and they lose their margin. Liquidations happen when the market moves against the position beyond the trader's margin coverage.
What is a short squeeze?
A short squeeze occurs when price rises rapidly, forcing short positions to liquidate. Each liquidation is a forced buy order, pushing price higher and triggering more short liquidations. This creates a cascade effect. Short squeezes often cause vertical price moves up.
What is a long squeeze?
A long squeeze is the opposite of a short squeeze. Price falls rapidly, forcing long positions to liquidate. Each liquidation is a forced sell order, pushing price lower and triggering more long liquidations. Long squeezes cause waterfall-style crashes.
How do I find liquidation levels?
Liquidation levels cluster at: (1) Recent swing highs/lows, (2) Round numbers, (3) High-leverage entry zones visible in exchange data, (4) Areas with high open interest buildup. Tools like Thrive and Coinglass show estimated liquidation levels.
What causes a liquidation cascade?
A cascade happens when liquidations trigger more liquidations in a feedback loop. Initial liquidations push price, triggering the next level of liquidations, which pushes price further. This continues until leverage is flushed from that direction.
How do I trade a squeeze?
Identify crowded positioning (extreme funding rate + high OI on one side). Wait for price to start moving against the crowd. Enter in the squeeze direction once it begins. Trail your stop as liquidations cascade. Exit when liquidations slow and price stabilizes.
What is a liquidation hunt?
A liquidation hunt is when price is deliberately pushed to liquidation clusters to trigger them. Market makers or whales do this to acquire liquidity (the liquidation orders). After hunting liquidations, price often reverses as the intended purpose was served.
How does funding rate relate to liquidations?
Extreme funding rates indicate crowded positioning. Very positive funding = longs crowded (long squeeze risk). Very negative funding = shorts crowded (short squeeze risk). High funding + high OI + price reversal = squeeze likely imminent.