BlockBeats reported on Sept. 28 that Coinkarma founder Benson Sun said the usefulness of liquidation heatmaps has been overstated and that they should not make up too large a part of a trading system.
He said many traders now spot a large liquidation cluster at a certain price level and immediately read it as a sign that price will definitely move there. In his view, that interpretation overlooks how much assumption is built into the chart itself.
Heatmaps do not show a direct picture of real positions
According to Benson Sun, most liquidation heatmaps are built by taking market trading history and applying a set of assumed leverage multiples, such as 5x, 10x, 20x, 30x, and 50x, to work backward and estimate where those positions might be liquidated after the trades were opened.
That means the liquidation clusters users see do not represent an identical amount of real positions actually sitting there and waiting to be wiped out. There are too many variables in between.
Position changes can quickly make the map stale
He said some of those traders may have already exited. Others may have added to positions, reduced them, or posted more margin. As long as position size, margin, or average cost changes, the liquidation heatmap will move with it.
The longer the time frame, the larger the error becomes. For that reason, he said the most useful window for a liquidation heatmap is roughly the last 24 hours to three days.
Looking further out at 7-day or 30-day views, or even treating liquidation clusters from months ago as current market magnet levels, has no meaning, he said.
Useful as a short-term reference, not a dominant trading input
Benson Sun said liquidation heatmaps can still serve as supporting information for short-term market structure, but they should not account for too much in a trading framework because they can create a false sense of certainty.
He added that there will always be liquidation clusters above and below price. If the market rises, people can say it first swept the shorts above. If it falls, they can say it first swept the longs below. If it drops and then rebounds, they can say it cleared longs first and then shorts.
Under that logic, almost any move can be explained after the fact, while remaining difficult to falsify in advance. In his words, that makes it less of an analytical tool and more like pure mysticism.