First, it's important to understand that the long positions and short positions on all exchanges are equal, maintaining a 1:1 ratio. For example, if Bob opens a long position of 10 bitcoins, it means that someone else or multiple individuals have opened short positions totaling 10 bitcoins at the same price. In the cryptocurrency futures market, there must always be counterparties for trades to occur. This is basic knowledge.
The classification of the long/short ratio in cryptocurrency contracts can be divided into the following categories:
1.Active trading long/short ratio， refers to the ratio of active buying volume to active selling volume within a certain time period. It reflects the short-term sentiment of traders and is primarily used for short-term trading. Active buying refers to the volume of buying initiated by traders or the inflow of funds. Active selling refers to the volume of selling initiated by traders or the outflow of funds.
Interpretation of the indicator: A large active buying volume indicates a high bullish sentiment in the market. If there is a large active selling volume, it indicates a significant bearish sentiment in the market, with many traders actively shorting the market.
2.Exchange accounts long/short ratio: This refers to the number of long accounts versus short accounts, often referred to as the number of participants on the long and short side. It represents the net positions of all holding users, with each account counted once.
Interpretation of the indicator: The purpose of this data is to reveal the tendencies of retail investors and institutional investors.
As we all know, the total position value of long and short positions in the market is equal. When the total position value is equal but the number of holders is different, it indicates that the average position value of the side with more holders is smaller, primarily consisting of retail investors, while the other side is dominated by institutional investors and large traders. When the long/short position ratio reaches a certain level, it indicates that retail investors tend to be bullish, while institutions and large traders tend to be bearish.
If the accounts long/short ratio is 1.5, it does not mean that the capital invested in long positions exceeds that in short positions. The total value of long and short positions is always equal. It indicates that the number of individuals holding long positions is 1.5 times higher than the number of individuals holding short positions. However, the total position value on both sides is equal. This suggests that there are more individuals on the long side, but the average position size per individual is smaller, possibly indicating a higher proportion of retail traders. Conversely, there are fewer individuals on the short side, but the average position size per individual is larger, possibly indicating a higher proportion of institutional or larger traders.
3.Exchange top trader account long/short ratio: This refers to the ratio of long and short positions held by top traders, specifically the proportion of net long and net short positions to total open positions of the top 20% users with the highest margin balance, with each account counted once.
Interpretation of the indicator: When trading cryptocurrency futures contracts, top traders generally possess a higher level of expertise compared to retail investors. Moreover, top traders exhibit more refined trading habits and a greater sensitivity to market trends than retail investors. Therefore, it is important for retail investors to consider the opening positions of top users as a reference.
However, it is important to note that some institutional investors and top traders may use futures contracts as hedging tools to offset their spot positions. Therefore, while considering this information, it is also necessary to incorporate one's own analysis and judgment.
4.Exchange top trader positions long/short ratio: This refers to the ratio of the total long and short positions held by top traders , specifically the proportion of net long and net short positions to total open positions of the top 20% users with the highest margin balance.
Interpretation of the indicator: It allows retail investors to intuitively perceive the position changes of top users and observe the timing of their opening and closing positions.
In summary, the cryptocurrency futures long/short ratio is a sentiment analysis indicator related to the views and actions of market traders. A high ratio indicates a bullish market sentiment, while a low ratio indicates a bearish market sentiment.
It's important to note that the cryptocurrency market operates as a zero-sum game, where smaller retail traders are at risk of being outperformed by larger traders. For example, when the long/short ratio becomes excessively high, with an overwhelming number of long positions, there may be a risk of a price drop due to a reverse harvest. Therefore, many people look at the Bitcoin accounts long/short ratio to gauge the sentiment of larger market participants.
Remember that in the market, it's usually a small portion of people who make money. As Warren Buffett said, "Be fearful when others are greedy and greedy when others are fearful."