Course Content
What Is a Short Squeeze?
Short selling allows traders to profit off an asset’s price decline. It’s a very common way to manage downside risk, hedge existing holdings, or simply express a bearish outlook on the market. However, shorting can be an exceptionally high-risk trading strategy at times. Not only because there is no upper limit for the price of an asset, but also due to short squeezes. A short squeeze can be described as a sudden price increase. When it occurs, many short sellers get “trapped” and quickly rush to the exit to try and cover their positions. Naturally, if you’d like to understand what a short squeeze is, you’ll need to understand what shorting is first. If you’re not familiar with shorting and how it works, check out What is Shorting In the Financial Markets?. In this article, we’ll discuss what a short squeeze is, how you can prepare for it, and even profit off it in a long position.
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What Is a Short Squeeze?
About Lesson
Short squeezes are very common in the stock market. This usually entails low sentiment around a company, a perceived high stock price, and a large number of short positions. If, say, some unexpected positive news comes out, all those short positions are forced to buy, leading to an increase in the price of the stock. Even so, a short squeeze is more of a technical pattern rather than a fundamental event.

According to some estimates, Tesla (TSLA) stock had been one of the most shorted stocks in history. Even so, the price has gone through a number of sharp rises, likely trapping a lot of short sellers.

Short squeezes are also quite common in the cryptocurrency markets, most notably in the Bitcoin markets. The Bitcoin derivatives market uses high-leverage positions, and these can be trapped or liquidated with relatively small price moves. As such, short and long squeezes happen frequently in the Bitcoin markets. If you’d like to avoid getting liquidated or trapped in such moves, carefully consider the amount of leverage you’re using. You should also adopt a proper risk management strategy.
Take a look at this Bitcoin price range below from early 2019. The price was contained in a range after a sharp move to the downside. Market sentiment was likely quite low, as many investors would be looking for short positions, expecting the continuation of the downtrend.

Potential short squeeze on the BTC/USD market.

However, price flew through the range with such haste that the area didn’t even get retested for a long time. It only got a retest years later, during the coronavirus pandemic (also known as “Black Thursday”). This rapid move was quite likely due to extensive short covering.
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