Liquidation Candle
The "Liquidation Candle": Decoding Crypto's Wild Swings and the Role of Market Makers
In the volatile world of cryptocurrency, price swings of 5%, 10%, or even 25% in a single day are far from unusual. A phenomenon that often catches traders off guard is the “Liquidation Candle”—a sudden, sharp price movement designed to force liquidations, leaving many traders licking their wounds and wondering who profits from their losses.
To understand this better, we must unpack how the crypto futures market operates, the role of Market Makers (or Mr. Market, as MoNoRi-Chan affectionately calls them), and how traders can navigate this minefield responsibly.
What is a Liquidation Candle?
A liquidation candle refers to an abrupt price spike or drop, typically lasting mere minutes, that triggers the forced closure of over-leveraged futures positions. For example, imagine Ethereum dropping over 10% in 3 minutes, only to bounce back to its previous level moments later. This sudden drop liquidates long positions, while an equivalent spike would liquidate shorts.
When traders use leverage, they borrow funds to increase their position size. However, with this comes the risk of liquidation, a process where an exchange forcibly closes positions when the market moves against the trader by a certain percentage.
Who Benefits from Liquidation Candles?
While it’s impossible to point fingers definitively, the beneficiaries of liquidation candles are often market makers and exchanges:
- Market Makers: Market makers provide liquidity to the order book, matching buyers and sellers. If there’s an overwhelming number of leveraged positions in one direction—say, too many traders are long—market makers face risks if prices skyrocket. To hedge their risk, they may force the market in the opposite direction, triggering liquidations. When positions are liquidated, market makers profit from the forced sale of collateral.
- Exchanges: Exchanges often have insider knowledge of liquidation prices and profit from the liquidation process via fees. Historically, some exchanges have been accused of enabling market makers by providing near-unlimited credit to execute these maneuvers, particularly in less liquid altcoin markets.
The Leverage Trap: Why Crypto Swings So Wildly
Leverage is a double-edged sword, amplifying both gains and losses. In crypto markets, leverage can go as high as 125x, making even small price movements catastrophic for over-leveraged traders.
For example:
- A trader using 10x leverage can be liquidated by a 10% price swing.
- A trader using 100x leverage can be wiped out by a 1% movement.
With so many traders chasing quick profits with high leverage, crypto markets become prime hunting grounds for liquidation events. Manipulating prices by 1-10% to trigger liquidations can be highly profitable for market makers, particularly in smaller markets where liquidity is thin.
As MoNoRi-Chan aptly puts it:
“Using 125x leverage is just shoveling yourself six feet under. If you’re going to gamble, at least don’t dig your own grave.”
Mr. Market’s Role in Liquidation Games
In the world of crypto, Mr. Market is a wily character. He’s not inherently good or evil—just opportunistic. He doesn’t care if you’re long or short, but he knows exactly where your liquidation price is. Whether prices are spiked to wipe out shorts or crashed to liquidate longs, Mr. Market’s loyalty lies with the institutions providing liquidity, not retail traders.
Responsible Trading: MoNoRi-Chan’s Guide to Surviving the Futures Market
MoNoRi-Chan, a seasoned trader, doesn’t entirely dismiss futures trading. Instead, he emphasizes using it responsibly, primarily as a tool for hedging against volatility rather than pure speculation.
Here’s his advice for traders navigating the treacherous waters of the crypto futures market:
- Hedge Instead of Gamble: “The correct way to use futures is to reduce risk. For instance, if you hold a spot position and expect prices to drop, open a short that’s equal or less to your portfolio size. If prices rise, you only lose the margin. If prices drop, your losses on spot are offset by the gains in futures.”
- Leverage is a Tool, Not a Weapon: Keep leverage low—ideally no more than 3x. Especially if you're new. As crypto is inherently volatile, high leverage isn’t necessary to achieve significant returns.
“This market isn’t designed for high leverage. Even if you’re right, the wild swings can wipe you out before you win.”
- Avoid Futures If You’re New: For newcomers, his advice is simple:
“Stay away from futures until you truly understand the risks. Otherwise, the market will take your future away before you realize what’s happening.”
- Small Coins Are Risky: Smaller, illiquid coins are particularly prone to manipulation. Avoid high-leverage trades in such markets where even minor capital can move prices drastically.
- Educate Yourself: MoNoRi-Chan’s trading philosophy revolves around education and preparation. He provides resources in this wiki for those serious about understanding the mechanics of trading and not just chasing the next pump.
The Fine Line Between Trader and Gambler
The crypto market blurs the line between responsible trading and outright gambling. With the allure of quick riches and the temptation of high leverage, it’s easy to fall into the trap.
As MoNoRi-Chan reminds us:
“There’s a fine line between a responsible trader and a gambler. Futures are a powerful tool, but only if you respect them. If you don’t, the market will hustle you faster than you can imagine.”
Final Thoughts
The phenomenon of liquidation candles underscores the ruthless nature of crypto markets. While it’s tempting to blame market makers or exchanges for manipulation, the reality is that these swings are baked into the system. They’re a reminder that crypto is a high-risk, high-reward environment where only the prepared survive.
The question isn’t whether liquidation candles will happen—they will. The question is whether you’re prepared to weather the storm or if you’ll be just another casualty of Mr. Market’s liquidation games.
Remember, in the crypto world, education and strategy are your best defenses. Leverage them wisely—or don’t use leverage at all.
