Recently, opportunities for short squeezes in altcoins have been frequent. I developed a monitoring script using AI and successfully captured $VOXEL last night. This article will elaborate on the strategy logic and guide how to write prompts to build a monitoring bot.
The current cryptocurrency market is affected by uncertainties in macro tariff policies, leading to heightened risk aversion and insufficient liquidity in risk assets. Traders holding large amounts of altcoins are facing difficulties: it is hard to sell their positions in the spot market, where will the liquidity come from? The answer is the perpetual contract market! This provides us with an opportunity to dance with the traders.
I. Strategy Logic Derivation#
How do traders exit through the perpetual contract market? Here is the step-by-step reasoning:
1. Trader's Dilemma#
Holding a large amount of spot positions, but the market lacks liquidity; selling directly would lead to a price crash.
2. Perpetual Contract Solution#
Short sellers are forced to buy spot or contracts when they stop-loss or get liquidated, providing liquidity to the traders.
3. Attracting Short Sellers#
Traders raise the spot price (affecting the mark price), inducing retail investors to short and take short positions on the perpetual contracts.
4. Negative Funding Rate Bonus#
An increase in short sellers leads to contract prices being lower than spot prices, causing the funding rate to turn negative, allowing traders holding long positions to earn funding fees and price differences.
5. Exit Strategy#
Push the price to resistance levels or liquidation zones, forcing short sellers to close their positions and buy, allowing traders to exit and even reverse to short. The core of this strategy is to leverage the "buying" behavior of short sellers to create liquidity for traders.
II. Core Monitoring Indicators#
Observable changes in indicators throughout the process include:
Extreme negative funding rate (high control of spot by traders) -> Abnormal increase in OI (traders establishing long positions) -> Continuous breakthroughs of resistance levels (gaining more long liquidity to exit) -> Long/Short Ratio decreases (retail investors being stopped out or liquidated) -> OI decreases, funding rate returns to normal levels.
To capture short squeeze signals, the following key data must be monitored:
1. Extreme Negative Funding Rate#
A large negative value (e.g., <-0.1%) indicates that traders have high control over the spot market, with excessive retail short participation, suggesting traders may be positioning long.
2. Surge in Open Interest (OI)#
A rapid increase in OI suggests that traders are accumulating positions by absorbing retail short positions.
3. Breaking Resistance Levels#
Prices breaking key levels may trigger short liquidations.
4. Indicators Returning to Normal#
After short liquidations, the long-short ratio rises, OI falls, and the funding rate returns to normal, indicating the end of the short squeeze. Among these, abnormal changes in funding rates and open interest (OI) are leading indicators for capturing signals! They need to be closely monitored.
III. AI Prompt Core#
Is manual monitoring inefficient? Use AI and Python code to create automated tools that capture abnormal signals in real-time and push alerts via Telegram Bot. The implementation steps are as follows:
1. Data Snapshot Acquisition#
Obtain key data for the perpetual contract USDT trading pairs from the Binance exchange API, including:
- mark_price (mark price)
- index_price (index price)
- basis (basis)
- basis_percent (basis percentage)
- last_funding_rate (latest funding rate)
- oi (open interest)
- long_short_account_ratio (account long-short ratio)
- top_trader_account_ls_ratio (large account long-short ratio)
- top_trader_position_ls_ratio (large position long-short ratio)
- taker_buy_sell_ratio (taker buy-sell ratio)
(Note: If AI acquisition fails, refer to the official API documentation: https://developers.binance.com/docs/derivatives)
2. Scheduled Execution and Data Saving#
- Run the program every 5 minutes to obtain data for all USDT perpetual contract trading pairs.
- Save the data to data/{symbol}.csv files for subsequent analysis.
3. Abnormal Alert Logic#
Set custom trigger conditions:
When the absolute value of the funding rate > 0.1% (i.e., last_funding_rate < -0.001 or > 0.001), and the average OI of the last 3 instances / the average OI of the last 10 instances > 2 (indicating a short-term surge in OI), push alerts via Telegram Bot to notify potential short squeeze signals. With the above prompts, you can build a bot to monitor short squeeze opportunities, and after obtaining signals, combine them with technical analysis to set take-profit and stop-loss levels. Such opportunities persist, so deploy your bot as soon as possible!
Original @AI Soros Kote
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🔥 Related Reading#
🔥 Useful Tools for Alpha Seeking#
1️⃣ Axiom Dog Tool https://axiom.trade
2️⃣ Gmgn Dog Tool https://gmgn.ai
3️⃣ dbot Dog Tool https://app.debot.ai
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