Short squeeze

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 a big news that leads to a trend reversal.

Short squeeze

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 a 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 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 pull back of a short squeeze.

As a long trader or normal investor:

The general existence of short squeezes mean 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 a 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?

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