Recently, opportunities for short squeezes in altcoins have frequently appeared. I developed a monitoring system using AI, successfully capturing $VOXEL. This article will explain the strategy logic and guide how to write prompts to create monitoring bots.
The current cryptocurrency market is affected by uncertainties in macro tariff policies, leading to increased risk aversion and insufficient liquidity in risk assets. Traders holding large amounts of altcoins are facing difficulties: the spot market is hard to sell, where will the liquidity come from? The answer lies in 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 a step-by-step reasoning:
1. Trader's Dilemma#
Holding a large amount of spot chips, 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 traders.
3. Attracting Shorts#
Traders raise the spot price (affecting the mark price), inducing retail investors to short and short on perpetual contracts.
4. Negative Funding Rate Bonus#
An increase in shorts leads to contract prices being lower than spot prices, causing the funding rate to turn negative, allowing traders holding long positions to earn funding and price differences.
5. Exit Strategy#
Push the price to resistance levels or liquidation zones, forcing shorts to close their positions and buy, allowing traders to exit, and even short back. The core of this strategy is to utilize the "takeover" behavior of shorts to create liquidity for traders.
II. Core Monitoring Indicators#
Observable indicator changes throughout the process include:
Extreme negative funding rate (high control of spot by traders) -> OI abnormal increase (traders establish long positions) -> Continuous breakthroughs of resistance levels (acquiring more long liquidity to exit) -> Long/Short Ratio decreases (retail investors are 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 high control of spot by traders, 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 a large number of retail short chips.
3. Breaking Resistance Levels#
Prices breaking key points 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 USDT perpetual contract 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 trigger conditions, customizable:
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 times / the average OI of the last 10 times > 2 (indicating a short-term surge in OI), push alerts via Telegram Bot to remind of potential short squeeze signals. With the above prompt, you can have a bot monitoring short squeeze opportunities. After obtaining signals, combine with technical analysis to set take-profit and stop-loss. Such opportunities persist, deploy your bot immediately!
Original @AI Soros Kote
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