Order book liquidity and liquidation heatmaps

Identify what a heatmap measures, reconcile walls with trades, calculate slippage and evaluate sweeps without assuming a guaranteed reversal.

Course outline

1. 1

   Distinguish order-book liquidity from liquidation heatmaps

   A bright band can be a resting order, a modelled liquidation level or a reported event. Read units, coverage and display settings before interpreting a heatmap.

   8 min

   In short: An order-book heatmap shows displayed resting orders that can still be cancelled; an estimated liquidation heatmap projects possible levels from assumptions about entries, leverage and margin; a realised layer aggregates reported forced-close events. Read units, relative scale and coverage first, and do not add these values together.

2. 2

   Track whether an order-book wall traded or disappeared

   Reconcile displayed depth with executed trades. An 800-unit wall reduction is not 800 units traded, and a shrinking wall proves neither a fill nor a spoof.

   8 min

   In short: A shrinking order-book wall can reflect trades, cancellations, repricing or a data update. Ending size = starting size + additions − cancellations − executions. An ask falling from 1,000 to 200 units with 100 units executed implies a net withdrawal of 700 units, which proves neither a fill nor a spoof.

3. 3

   Calculate execution VWAP by walking order-book depth

   Walk a market order through order-book depth. Calculate the average execution price (VWAP) and slippage in basis points before costs outweigh the setup.

   8 min

   In short: A buy walks the asks from the lowest price up until the quantity is filled. Execution VWAP = sum of price × filled quantity ÷ total filled quantity, and slippage in basis points = (VWAP − P) ÷ P × 10,000 against a stated reference P. Fees are added separately.

4. 4

   Evaluate a liquidation cascade without calling a bottom

   Separate forced-close evidence from a reversal hypothesis. Compare continuation and reclaim paths after price and open interest fall together.

   8 min

   In short: A liquidation cascade shows forced position reductions, not that the last forced seller has finished. After price and OI fall together, predefine both paths: a recovery needs its own reclaim test, such as two five-minute closes above a level and a retest that holds, while repeated failed reclaims keep continuation open.

5. 5

   Plan a liquidity sweep and reclaim as a testable setup

   Define the reference level, sweep, reclaim and invalidation before entry. See how a 2:1 chart ratio becomes 1.5:1 after costs, and log failed sweeps too.

   8 min

   In short: Define the reference level, how far price must trade beyond it, the reclaim condition and the invalidation before the wick forms; a sweep does not prove that stop-loss orders were resting there. Then recalculate after costs: 2.00 reward and 1.00 risk with 0.20 costs per unit give 1.80 ÷ 1.20 = 1.5, not 2.

Open full-size diagram

1. Distinguish order-book liquidity from liquidation heatmaps
2. Track whether an order-book wall traded or disappeared
3. Calculate execution VWAP by walking order-book depth
4. Evaluate a liquidation cascade without calling a bottom
5. Plan a liquidity sweep and reclaim as a testable setup

Educational material. Examples do not establish a profitable strategy. Trading costs, gaps and liquidation can produce losses beyond a planned stop.