Short squeeze

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    What is a short squeeze? Definition

    A short squeeze is a fast increase of a stock price when multiple traders who had shorted a stock close (also called “cover”) their positions. When short sellers close their trades, they need to buy the stock they had shorted and the price increases. Usually, this occurs after big news that leads to a trend reversal.

    How can I as a trader or investor benefit from a short squeeze?

    The nature of a short squeeze makes it interesting for traders to enter a trade directly after big news has been released that led to a trend reversal. Often the trend reversal is permanent, making it suitable not only for traders but also for investors who are looking to enter a new position at the beginning of a new trend.

    What does the possibility of a short squeeze mean for me as a trader generally?

    It depends on whether you are looking at it from the perspective of a short seller or a someone who is “long” the financial instrument.

    As a short trader:

    Short positions can help you earn money when the price goes down, so the mere existence of short squeezes should not hold you back from opening a short position. However, you should consider the size of your position carefully.
    It may be worth considering closing large short positions before big, pre-announced news events. Small positions, on the other hand, allow you to ride an entire trend and pay a bit less attention because it should generally suffice to close the trade when the trend is visibly over or even during the pullback of a short squeeze.

    As a long trader or normal investor:

    The general existence of short squeezes means that counter-cyclical investors like to look for stocks with a high percentage of short-sellers. If an investor believes in the long-term potential of such stock or currency, then each short seller could be considered someone who will have to buy this financial instrument at some point in the future.

    How can I become better at short selling and handling short squeezes?

    Learn more about trading, investing and personal finance through top courses by the world’s leading experts at https://learn.tradimo.com.