About Lesson
A short squeeze happens when there is a sudden increase in buying pressure. If you’ve read our article about shorting, you know that shorting can be a high-risk strategy. However, what makes a short squeeze a particularly volatile event is the sudden rush to quickly cover short positions (via buy orders). This includes many stop-loss orders triggering at a significant price level, and many short sellers manually closing their positions at the same time.
A short squeeze can happen in essentially any financial market where a short position can be taken. At the same time, the lack of options to short a market can also lead to large price bubbles. After all, if there’s no good way to bet against an asset, it may keep going up for an extended period.
A prerequisite of a short squeeze can be a majority of short positions over long positions. Naturally, if there are significantly more short positions than long positions, there’s more liquidity available to fuel the fire. This is why the long/short ratio can be a useful tool for traders who want to keep an eye on market sentiment. If you’d like to check the real-time long/short ratio for Binance Futures, you can do it on this page.
Some advanced traders will look for potential short squeeze opportunities to go long and profit off the quick spike in price. This strategy will include accumulating a position before the squeeze happens and using the quick spike to sell at a higher price.