The "John Wick" Strategy: Capitalizing on Crypto Reversals Post-Liquidation

Traders are akin to seasoned navigators charting the choppy waters of volatility. Named after the cool, calculated protagonist of the action-thriller film series, the "John Wick" Strategy is a methodical approach designed to exploit potential market reversals following periods of intense liquidation.

Liquidations in crypto perpetual futures occur when a trader's position is closed by the exchange because the trader's margin balance falls below the required maintenance margin level. This process is designed to prevent a trader's account from falling into negative equity and to protect the financial stability of the exchange and its participants.

When a large number of long positions are liquidated, the market is flooded with sell orders, pushing the price down. Conversely, the liquidation of short positions results in buy orders, which can push the price up. However, because of the structure of perpetual futures markets, long liquidations are more common during market downturns, exacerbating the fall in prices.

The Premise

The strategy hinges on the simple premise that after a significant number of liquidations, an asset may be primed for a reversal. Just as John Wick responds to chaos with precision, traders utilizing this strategy watch for the long wicks of candlestick charts—tails that signal rejection of higher or lower prices.

The Setup

1. Identify Mass Liquidations: Using the aggregated liquidations panel, traders identify a significant spike in liquidations. Red bars indicate a considerable number of short positions have been liquidated (price shot up), while green bars indicate long position liquidations (price dropped).
2. Spot the Wick: Post-liquidation, the focus turns to the candlestick chart. A long wick indicates a rapid move away from prices—either high sell-offs (long wick up) or buying spurts (long wick down). The strategy looks for a long wick that stands out amid the recent price action, signaling a potential exhaustion of the trend.
3. Volume and CVD Confirmation: A confirmation is sought in the trading volume. An ideal scenario would feature a volume spike coinciding with the long wick, showing high trading interest at the price levels rejected by the market. The CVD's movement can also validate if the push was backed by substantial market participation.
4. Funding Rates and Open Interest: Positive funding rates in this scenario suggest that the market sentiment was bullish, but the long wick down would indicate a sharp, short-term bearish rebuttal. Conversely, negative rates followed by a long wick up suggest a bearish sentiment with a bullish pushback. Open Interest will show if new money is entering the market or if positions are unwinding.

Execution

• Long Position Entry: If the liquidation is predominantly green and followed by a pronounced long wick down, indicating a swift rejection of lower prices, a trader may enter a long position near the base of the wick, betting on a bullish reversal.
• Short Position Entry: Conversely, after a wave of red liquidation bars and a standout long wick up, a trader may go short, anticipating that the price rejection at the upper levels signifies a turning tide and potential bearish reversal.

Risk Management

The "John Wick" Strategy is not a headfirst dive into vengeance but a measured response to market overreactions. It demands strict risk management protocols, including setting stop-loss orders just beyond the wick's extreme to mitigate potential losses should the market not reverse as anticipated.

Caveats

While the strategy aims to take advantage of overextended market moves, it is crucial to remember that no strategy is infallible. External factors, such as news events or shifts in fundamental market dynamics, can render technical setups like this ineffective. The market's high volatility and the often unpredictable nature of crypto assets require traders to be adaptable and ready to exit positions if the market context changes.

In essence, the "John Wick" Strategy is about precision, timing, and the cold-blooded execution of trades based on clear, observable market behaviors. It is a calculated response to the pandemonium of mass liquidations, where the sharp trader waits for the dust to settle before making a move, just as the eponymous hero waits for the perfect moment to strike.