What is a market squeeze?
A market squeeze can refer to either a ‘short squeeze’ or a ‘long squeeze’. A short squeeze affects short sellers, who are effectively ‘squeezed’ out of the market in light of rapidly increasing prices. They will attempt to exit their short positions as quickly as possible to cut their losses.
A long squeeze is when buyers – people who are long on a stock – are ‘squeezed’ out of the market in light of suddenly decreasing prices. Again, they will attempt to exit their positions quickly to prevent heavy losses.
What is a short squeeze?
A short squeeze is when market prices rise rapidly beyond what analysts and market participants had expected. Short squeezes can hit investors who are shorting the market with borrowed stocks particularly hard, because they could end up spending more money to rebuy and return the borrowed stock – known as short covering – than they anticipated.
They can also be damaging for traders who are shorting a stock with financial derivatives like spread bets and CFDs. This is because derivatives are traded with leverage which can increase both your profits and losses. This is especially true during a short squeeze or similar scenario where markets behave in an unexpected way.
What causes a short squeeze?
A short squeeze is caused by a rapid and unexpected surge in the price of an asset – usually a stock. Short sellers will seek to abandon their short positions as prices rise.
This causes demand for the stocks to rise, which reduces supply. This shift in the supply-demand dynamic causes prices to rise further, which compounds the effect of the short squeeze.
If investors are using a short covering strategy with borrowed stock, they will need to buy back the shares which they have borrowed to open the short position before the expiration date arrives. The expiration date in a short cover is the date on which the borrower agrees to return the stock to the lender.
How to identify a short squeeze
To identify a short squeeze, many traders will use chart indicators to find oversold stocks. If a stock or other asset is oversold, then people might expect its price to increase. Popular indicators that are used to identify oversold areas include the relative strength index (RSI) and the Williams %R.
In the below screengrab – taken from our trading platform – the RSI is the top indicator and the Williams %R is the bottom indicator. Oversold areas are shown by the rectangular highlights.
"short" - Google News
July 01, 2020 at 11:37PM
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What is a short squeeze? - IG
"short" - Google News
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